A Clear Requirement, but Rough Returns So Far in 2024

Key Takeaways

At WisdomTree, we put together our Thematic Classification, which places U.S.-listed thematic exchange-traded funds into more than 40 distinct topics. This allows us to see how investors are participating in the space—both where the money is being allocated and where the money is leaving.

For the first six months of 2024, cybersecurity was the second biggest outflow generator of all the thematic topics we track, with roughly $1.1 billion coming OUT from funds in this category.¹

For reference, the semiconductor category over this same six-month period took in $5.8 billion, meaning that it almost achieved an average inflow per month of $1 billion.¹

When we speak to investors about the six thematic investments in our own range:

• Cybersecurity: No one needs to be convinced that it is necessary. While it is not certain what specific software will be used for security purposes, it is certain that any company without a cybersecurity strategy is taking a significant risk. Yet, this necessity for the topic has not translated at all into returns in 2024.

• Artificial Intelligence: This theme has generated a lot of attention and excitement, but the biggest question out there, at least as of August 2024, is how to marry the massive capital investments with appropriate money-making opportunities. As of this writing, there are more questions than answers in this regard. Returns of the Magnificent 7 companies (Nvidia, Microsoft, Amazon, Alphabet, Apple, Meta Platforms and Tesla) have faced challenges during the early reporting period after the June 30, 2024, quarter ended.²

• Cloud Computing: Think about the last time you tried to put any sort of disc into your computer. The world has shifted from buying software to subscribing to software. However, investors have a lot of questions as to how the evolution of artificial intelligence is going to impact legacy software businesses, so the space has been quite volatile. The primary focus regards the big enterprise deals, and these deals are taking longer to close as customers are either budget constrained or seeking more clarity on whether generative AI can accomplish similar tasks to specialized software.³

• BioRevolution: Of all the topics we discuss in the thematic equity space, investors tend to be most excited about biotechnology. It’s also true that there is a difference between a general person getting through their emails 20% or 30% faster versus getting personalized medical treatments. Biotechnology has the potential to change how we live our lives—but the timeline for a lot of these innovations is very uncertain. Returns in recent years have also been challenging.

• Energy Storage: U.S. investors, politically speaking, seem to prefer to avoid China’s equities as we write these words in August 2024. Presently, a lot of the materials and processing involved in manufacturing batteries at scale does run through China.⁴ China’s difficulties economically have impacted returns, even if the world absolutely wants to increase battery manufacturing capacity across the board.

• New Economy Real Estate: Related to the AI discussion and capital spending, a lot of that is being funneled toward data centers. So far, the opportunity for generating returns has been more tilted toward the hyperscalers—the companies seen to provide the platforms for running the AI applications—but it will be interesting to see if there comes a time when the data center REITs begin to perform more strongly.

Cybersecurity Stands Out

In thinking of these six topics, five of them have a lot of outstanding questions. One of them, cybersecurity, has almost no questions about the topic’s potential, but it has a disproportionate number of questions around the lackluster returns during the first seven months of 2024.

As we move through August 2024, we see a few different elements potentially setting up:

• WisdomTree’s strategy, the WisdomTree Cybersecurity Fund (WCBR), delivered a return of nearly 70% in 2023, helped dramatically when the world believed, during the last two months of the year, that U.S. Federal Reserve policy rate cuts would occur in early 2024. This expectation was incorrect, so we believe a lot of this year’s lackluster return represents a correction of this mistaken expectation rather than a view of whether or not the growth prospects of cybersecurity companies are still there. The period from September to December of 2024 may see interest rate cuts—maybe the responsiveness in WCBR’s performance from 2023 rears its head again.

• In July 2024, CrowdStrike made a historic mistake with a particular software update that led to the “blue screen of death” on a huge number of computers with Microsoft operating systems.⁵ Any company in any industry can make big mistakes, and we think that if CrowdStrike uses this to improve its processes and double down on quality control, the massive reduction in share price could represent a buying opportunity. We’d remind people the company Solar Winds is still a public-listed company and still has clients even after an historic hack in 2020.⁶

• For the better part of the past two years, C-suite managers across public companies were almost required to mention AI. We agree that this is a big topic, but adoption of these types of technologies will take time—we won’t see AI making an impact across all industries in the next six months. However, chief information security officers (CISOs) need to secure their systems now, and there are not enough people with the appropriate expertise they can hire. Using software-oriented solutions is a necessity, and it is hard to cut cybersecurity budgets.

WisdomTree Works with a Unique Expert

On August 1, 2024, we saw the below tweet on the X platform:

It’s interesting to see this from a former FBI assistant director. The context was a discussion about being able to access the phone of the individual involved in the assassination attempt on Former President Trump, and how Israel has better capabilities to get into smartphones than the FBI. Over the course of its existence, Israel has been required to be very capable—its defense has depended on it. Within the Israeli Defense Force (IDF), there is a specific unit, 8200, that is focused on cyber activities. With the requirement of military service, this unit has access to some of the best and brightest citizens coming out of high schools across the nation.

The WisdomTree Cybersecurity Fund (WCBR) is designed to track the total return performance, before fees and expenses, of the WisdomTree Team8 Cybersecurity Index. Our expert partner, Team8, is  analyzing the specific cybersecurity offering of all constituent companies on a semiannual basis. The “8” in Team8 and the “8” in 8200 is not the same by coincidence. A lot of the cyber expertise at Team8 comes from people exiting Unit 8200 and seeking employment in the private sector.

While returns can never be guaranteed, the fact is that the group doing the analysis semiannually to determine the best ways to gain exposure to future trends in cybersecurity has unquestioned global expertise on the topic. Insights from Team8 help to drive the stock selection of the WisdomTree Team8 Cybersecurity Index on a semiannual basis, refreshed in March and September of each year. It remains to be seen what impact Fed policy and other macro factors will have on this thematic space for the remainder of 2024.  

 

 

¹ Sources: WisdomTree, Morningstar, Bloomberg. All data as of 6/30/24 and based on WisdomTree’s internal classification of thematic funds. Performance is based on monthly returns from Bloomberg and Morningstar.

² Source: Lucy Brewster, “Big Tech Is Down Bad”, Brew Markets, 6/25/24. https://www.morningbrew.com/brew-markets/stories/2024/07/25/tech-stock-selloff-ai-rally-bear-market.

³ Source: Andrew Change, “Midyear 2024 IT Forecast Update: Robust Cloud Spending Offsets Still-Cautious Enterprise Budgets”, S&P Global. 7/17/24. https://www.spglobal.com/ratings/en/research/articles/240717-midyear-2024-it-forecast-update-robust-cloud-spending-offsets-still-cautious-enterprise-budgets-13183985.

⁴ Source: Agnes Chang & Keith Bradsher, “Can the World Make an Electric Car Battery Without China?”, The New York Times, 5/16/23. https://www.nytimes.com/interactive/2023/05/16/business/china-ev-battery.html.

⁵ Source: https://www.crowdstrike.com/falcon-content-update-remediation-and-guidance-hub/.

⁶ Source: “Investor Relations”, Solarwinds, https://investors.solarwinds.com/overview/default.aspx.