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Gen Z, Memes, Digital Revolution Kicked to Curb in Fad-ETF Purge

Thematic ETFs that launched to target the buzziest market themes of the past two years are closing at a rapid pace, as rising interest rates hammer performance and send investors in search of safer options.

(Bloomberg) -- From meme stocks to crypto-themed products, exchange-traded fund closures are mounting in what were once some of the trendiest areas of the $6.8 trillion industry.

Thematic ETFs that launched to target the buzziest market themes of the past two years are closing at a rapid pace, as rising interest rates hammer performance and send investors in search of safer options. These niche strategies are now increasingly looking like fads, and many have assets of less than $30 million and negative returns since inception, criteria Bloomberg Intelligence says puts them at greater risk of shutting down.

Many feature technology names with stretched valuations, which are bearing the brunt of Federal Reserve policy tightening and the subsequent pullback in buyer interest as traders turn to more economically sensitive shares. Against that backdrop, products like the Generation Z ETF (ZGEN), the Defiance Digital Revolution ETF (NFTZ) and the Roundhill MEME ETF (MEME) have been among high-profile casualties.

“If you’re looking at a firm that’s going to consumers and investors and saying, ‘Hey, we’re going to build this unbelievable product. It’s going to have a high-growth technology commitment, which means most of the cash flows are going to come in the future’ — a great proposition with interest rates at zero, a much tougher proposition with interest rates at 4.5-5%,” said Roosevelt Bowman, senior investment strategist at Bernstein Private Wealth Management.

Thematic funds have suffered outflows for nine straight months — the longest streak in at least seven years, according to data tracked by BI.

It’s a blow to many smaller ETF issuers, who were seeking to establish themselves with such targeted offerings. In fact, more ETF shutdowns are likely among exotic, tech-heavy categories, according to BI.

Gen Z

ZGEN, which launched less than two years ago as a thematic fund with a mission to invest in firms that are teenager-friendly, closed for purchases in March. 

Holding companies like Tesla Inc. and Duolingo Inc., the fund’s sub-advisor Alkali Fintech LLC attributed the closure to the “negative” macroeconomic climate. 

Tokens Tumble

From Voyager to FTX, several cryptocurrency firms went bankrupt last year after coin prices declined massively. As a result, the value of nonfungible tokens — many of them cartoon pictures of apes — took a nosedive. NFTZ, touted as the world’s first ETF for NFTs, closed in February.

The fund tracked blockchain-related companies and an NFT index, and was part of a greater collapse of crypto-themed products. Launches worldwide for exchange-traded products focused on digital assets have dwindled.

Day-Trader Favorites Slammed

Betting on meme stocks was a way to capture the huge price swings of small-time traders’ most beloved names, but much of the recent movement has been to the downside with risky investments reeling from a hawkish Fed. 

MEME was introduced in late 2021, a far cry from the days of epic short squeezes in GameStop Corp. and AMC Entertainment Holdings Inc. MEME, counting Block Inc. and First Republic Bank among its top holdings, has plunged over 60% since its December 2021 inception.

“It’s extremely difficult to time thematic plays,” said Todd Sohn, an ETF strategist at Strategas Securities. “Unless you are a believer in the long-term idea.”

Psychedelics Can’t Hook Investors

After being brought to market in mid-2021, Defiance ETFs shuttered its Next Gen Altered Experience fund (PSY) just over a year after its inception. 

The fund, which sought to invest in companies that conduct federally legal medical activities with psychedelics, cannabis and ketamine, plunged over 50% in the year it started trading and was never able to recover given regulatory challenges in the US and its concentrated grouping of biotechnology stocks. 

Like PSY, Horizons ETFs’ psychedelic fund — PSYK — also targeted companies offering innovative medical products such as Cybin Inc. and Seelos Therapeutics Inc. The product was liquidated in March.

To be sure: not all hyped strategies are struggling. 

Tuttle Capital CEO Matthew Tuttle is behind the anti-disruption AXS Short Innovation Daily ETF (SARK) and a pair of products that track the stock calls of CNBC anchor Jim Cramer — each of which are bringing in positive flows for the year.

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