2020 could be a banner year for exchange-traded funds.
With ETFs attracting more than $73 billion of inflows as of Feb. 7, according to ETF.com, this year is shaping up to be a strong one for the industry, particularly with the rise of thematic ETFs.
As the industry expands and financial advisors more readily embrace ETFs as a viable investment option, the prospects for thematic funds are improving, ETF managers told CNBC's "ETF Edge" last week.
"One of the hottest themes right now is cloud computing," said Jay Jacobs, head of research and strategy at Global X ETFs. "And you don't have to listen to us. Look at what the big tech companies are talking about in their earnings."
"AWS is most of what Amazon's focusing on. IBM is replacing their CEO with the head of their cloud unit. Microsoft? All they want to talk about is Azure and their 60% revenue growth. [Alphabet] is now breaking out their cloud revenue from the rest of their revenue reporting," Jacobs said. "This is a theme that isn't just coming from the ETF industry. This is coming from the technology sector saying, 'Our growth is going to come from cloud computing.'"
Global X capitalizes on that theme with its Cloud Computing ETF (CLOU), which counts shares of Shopify, Paycom, Paylocity and Zscaler among its top holdings. While stock performance doesn't directly correlate to inflows, CLOU has climbed more than 15.5% year to date and had about $476 million in net assets as of Friday.
"We purposely kind of tilted the exposure of the ETF away from the Amazons and away from the Googles because they're not really pure plays in the cloud-computing space," Jacobs said. "We've tilted it more towards those pure-play software as a service companies that are built through the cloud and are leveraging that technology."
That sticky, growth-driven, recurring-revenue business is also present in the robotics and artificial intelligence space, which Global X is tracking with another one of its themed ETFs: the Robotics & Artificial Intelligence ETF (BOTZ).
With Nvidia, European automation company ABB and Intuitive Surgical making up some of the ETF's biggest weightings, BOTZ gives investors a way to buy into a theme they know is taking hold, but may not feel all too familiar, Jacobs said. That fund is up more than 3% year to date and had more than $1.5 billion in net assets as of Friday.
"I think this is intuitive with investors. They see that automation is getting more powerful, that companies are investing in robotics, they're investing in bringing in AI systems, but they don't really know where to start. Who are the big robotics companies?" he said. "They're not ... common knowledge to U.S. investors. The ETF, I think, is a perfect example of giving people that exposure to the companies best positioned in the space."
But where Global X is seeing inflows into new, up-and-coming funds, iShares and other large issuers are seeing strength in longer-lived plays.
"We do believe rates are staying lower," Armando Senra, head of iShares Americas at BlackRock, said in the same "ETF Edge" interview. "That's why we're also recommending emerging market debt [and] high yield as a way to pick up in yield, again, because we have a moderate-constructive view on market risk. What I would say is ... with fixed income ETFs, what you see is the replacement of bonds for fixed income ETFs."
Over half of 2019's net ETF inflows went into fixed income ETFs, which has grown to a trillion-dollar part of the overall market. Senra told "ETF Edge" in September that that $1 trillion in fixed income ETFs could double in the next five years.
Ed Rosenberg, head of ETFs and senior vice president at American Century, said in the same interview that the rush to these kinds of funds is simply a function of ETFs "gaining momentum."
"As the landscape shifts and advisors want more and more ETFs, they're going to look to different versions, whether it's thematic or whether it's basic. They're just going to come more into play," Rosenberg said. "We've never been off to the start that I've seen and, quite frankly, it looks like we could be in for a great year for all of us and I think that says a lot for where ETFs not only came from, but where they're headed."
CLOU climbed just under 1% in Tuesday trading. BOTZ lost more than 1%.