By almost any account, the S&P 500 Index year-to-date performance has been incredibly narrow and concentrated. Just seven companies account for the entire 10% return. The other 493 companies combined are delivering a slightly negative return. Stunning.

The mega-cap stocks at the very top of the S&P 500 Index (Apple, Microsoft, Amazon, Google, and Tesla) that led the 18% decline in 2022 are back in a market leadership position and are accounting for the majority of the market’s 10% gain in the first five months of 2023. Those five companies lost almost 4 trillion dollars of equity market capitalization last year. They were the five biggest losers on that metric last year. Yet, they have increased in value by nearly 2.5 trillion dollars this year. Today, they are five of the seven biggest winners in market cap gained. NVIDIA and Meta are the other two.

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Recent developments in artificial intelligence (AI) have captured the attention of investors and the media alike, drawing comparisons to other major disruptive technologies, such as the Internet or the smart phone. Below, we discuss some of the underlying factors that have contributed to the growing excitement surrounding AI, highlighting a few specific use cases. We also explore some of the trends impacting robotics, AI’s physical counterpart. In our view, the First Trust Nasdaq Artificial Intelligence and Robotics ETF (ROBT) and the First Trust Nasdaq-100-Technology Sector Index Fund (QTEC) are two compelling options for gaining exposure to these emerging trends.

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Thematic ETFs provide exposure to stocks that may benefit from certain secular growth trends expected to transpire over the next several years. Investment themes such as artificial intelligence and robotics, cybersecurity, green energy, infrastructure, and biotechnology (among others) generally have little representation in ETFs tracking broad market indices. By implementing thematic ETFs, investors can broaden their equity holdings with targeted exposure to industries poised for robust growth and technological innovation.

In our Q1 2021 edition of Inside First Trust ETFs, we offered four principles for investment professionals seeking to incorporate thematic investments into client portfolios. Although investor sentiment has been weakened by the bear market that emerged in 2022, we believe significant opportunities remain for long-term investors. For those considering exposure to thematic investments, we believe these principles may be worth revisiting.

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• Net inflows for US-listed ETFs totaled $29.4 billion in April, bringing total ETF assets under management to $6.87 trillion.
• Equity ETFs had net inflows totaling $8.4 billion in April, bringing trailing 12-months (TTM) net inflows to $286.7 billion. Active equity ETFs accounted for $6.0 billion in net inflows in April, compared to $2.4 billion in net inflows for passive equity ETFs. Total AUM in actively managed equity ETFs were $221.4 billion, accounting for 4.2% of all equity ETF assets ($5.32 trillion), as of 4/30/23.
• Fixed income ETFs had net inflows totaling $20.7 billion in April, bringing TTM net inflows to $229.2 billion. Active fixed income ETFs accounted for $1.0 billion in net inflows in April, compared to $19.7 billion in net inflows for passive fixed income ETFs. Total AUM in actively managed fixed income ETFs were $145.5 billion, accounting for 10.5% of all fixed income ETF assets ($1.39 trillion), as of 4/30/23.
• Commodities ETFs had net inflows totaling $0.5 billion in April, bringing TTM net outflows to $25.8 billion. Precious metals ETFs (+$1.2 billion) was the strongest commodity sub-category in April.

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In Samuel Becketts’ play Waiting for Godot, the two main characters sit around all day talking and anticipating when Godot will  finally appear. He never arrives. Today, practically everyone is anticipating a recession and positioning for one. Is it possible, that,  like Godot, it never shows up? Sure, anything is possible. But let’s think about the consequences of that for a moment.  

If we avoid a recession, will the Federal Reserve (Fed) cut rates significantly and quickly? Probably not. Will inflation get to  the Fed’s 2% goal without a recession and higher unemployment? Unlikely. So, in our view, a soft landing would mean a  tougher inflation fight and higher rates for longer even if the Fed pauses for a while. Not great news for stocks nor a recipe  for high earnings growth.

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First Quarter 2023 Overview

After a positive fourth quarter of 2022 which saw the average closed-end fund (CEF) post a total return of +6.4%, CEFs continued their positive momentum in 1Q23 and rose on average +3.4%. It was a broad rally with total returns of +4.2% for equity CEFs, +3.0% for fixed-income CEFs, +2.7% for municipal CEFs, and +3.2% for taxable fixed-income CEFs. Every category tracked by Morningstar was positive during 1Q23 except for California state specific municipal CEFs (-1.7%) and preferred CEFs (-2.7%). (Source: Morningstar. All data is share price total return) 

Equity CEFs benefitted from a +7.5% total return for the S&P 500 Index and a +7.0% total return from the MSCI ACWI ex USA Index for 1Q23. Fixed-income CEFs benefitted from positive total returns from several key fixed-income indices for 1Q23 including a +3.7% for the ICE BofA High Yield Bond Index, a +3.3% return for the Morningstar® LSTA® US Leveraged Loan Index, a +2.6% return for the ICE BofA 7-12 Year US Municipal Securities Index, a +3.0% return for the Bloomberg US Aggregate Bond Index and a +3.0% return for the Bloomberg Global-Aggregate Index. (Source: Bloomberg)

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Despite the Federal Reserve (the “Fed”) raising rates over the past year at the fastest pace since the early 1980s, risk assets remained on a positive and robust trajectory in the first quarter of 2023. Investors appeared not to be thinking about the likely economic impact from 500 basis points (bps) of tightening this cycle. Rather, they seemed more focused on the Fed potentially cutting rates sooner than later. The high-profile failure of two banks, a collaborative rescue of a third, and the forced sale of Credit Suisse to UBS did not seem to shake the confidence of investors. It did apparently cause some concern among financial regulators as it prompted the U.S. government (Federal Reserve, FDIC and the U.S Treasury) to take the unprecedented action of guaranteeing all depositors in the failed banks regardless of the amount of the deposit. Depending upon one’s perspective, the markets are either extraordinarily resilient or in need of extraordinary support and by extension, extraordinarily fragile. 

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• Net inflows for US-listed ETFs totaled $29.8 billion in March, bringing total ETF assets under management to $6.76 trillion.
  
  
• Equity ETFs had net inflows totaling $3.3 billion in March, bringing trailing 12-months (TTM) net inflows to $250.4 billion.  Active equity ETFs accounted for $6.4 billion in net inflows in March, compared to $3.2 billion in net outflows for passive equity ETFs.  Total AUM in actively managed equity ETFs were $214.3 billion, accounting for 4.1% of all equity ETF assets ($5.23 trillion), as of 3/31/23.
  
  
• Fixed income ETFs had net inflows totaling $27.4 billion in March, bringing TTM net inflows to $221.0 billion.  Active fixed income ETFs accounted for $0.2 billion in net inflows in March, compared to $27.2 billion in net inflows for passive fixed income ETFs.  Total AUM in actively managed fixed income ETFs were $144.4 billion, accounting for 10.6% of all fixed income ETF assets ($1.37 trillion), as of 3/31/23.
  
  
• Commodities ETFs had net outflows totaling $0.4 billion in March, bringing TTM net outflows to $23.7 billion. Precious metals ETFs (+$0.5 billion) was the strongest commodity sub-category in March.

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The stock market displayed resilience in the first quarter of 2023 even as earnings forecasts for this year modestly declined. For the  quarter, the S&P 500 Index was up 7.5%. At the beginning of 2023, earnings were expected to grow by low single digits by the end of  the year. Today, 2023 earnings are expected to be down slightly from 2022. Yet, the growth sectors of the economy are dominating like it’s 1999! Year-to-date through 3/31/23, Information Technology is up 22%, Communication Services 21%, and Consumer Discretionary  16%. Megacap growth companies are heavily weighted in these sectors and have led the way with outperformance in the first quarter.  Even a speculative basket First Trust tracks, the 100 stocks with high price-to-sales ratios, modestly outperformed the S&P 500 Index.¹ Defensives and cyclicals are slightly up or modestly lower. Financials is the worst sector down 6% reflecting the current banking tumult.

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¹The 100 stocks with the highest Price/Sales from the universe of the 1,000 largest US firms with at least $1 million in average daily volume over the last 3 months  and 12 months of trading history. 

• Net inflows for US-listed ETFs totaled $4.4 billion in February, bringing total ETF assets under management to $6.70 trillion.
• Equity ETFs had net inflows totaling $8.0 billion in February, bringing trailing 12-months (TTM) net inflows to $302.6 billion. Active equity ETFs accounted for $7.7 billion in net inflows in February, compared to $0.3 billion in net inflows for passive equity ETFs. Total AUM in actively managed equity ETFs were $206.8 billion, accounting for 4.0% of all equity ETF assets ($5.22 trillion), as of 2/28/23.
• Fixed income ETFs had net outflows totaling $1.8 billion in February, bringing TTM net inflows to $214.0 billion. Active fixed income ETFs accounted for $3.1 billion in net inflows in February, compared to $4.9 billion in net outflows for passive fixed income ETFs. Total AUM in actively managed fixed income ETFs were $144.3 billion, accounting for 10.9% of all fixed income ETF assets ($1.32 trillion), as of 2/28/23.
• Commodities ETFs had net outflows totaling $0.7 billion in February, bringing TTM net outflows to $13.3 billion. Energy ETFs (+$0.5 billion) was the strongest commodity sub-category in February.

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