Talk Your Book: How to Use Thematic ETFs

Episode Summary

Executive Summary: The episode centers on thematic ETFs and whether narratives like rising rates hurting growth stocks actually explain market moves. Dave Mazza of Direxion argues these funds are built around long-term structural shifts—remote work, hydrogen, and innovation-led moonshots—rather than short-term trades, and that investors should use them as concentrated satellite exposures with careful position sizing because volatility is high and outcomes are uncertain.

Main Topics: Thematic ETFs as the next evolution of sectors (Priority: 5/5): The discussion frames thematic ETFs as a more granular successor to traditional sectors and industries, designed to capture innovation that cuts across old classification boundaries. Interest rates and growth-stock narratives (Priority: 5/5): Ben and Michael debate whether rising rates truly drive growth-stock underperformance, concluding the relationship is partly real, partly narrative, and not reliable enough to anchor long-term investing. Work-from-home investing (Priority: 5/5): Dave explains that the WFH ETF is built around the infrastructure of remote work—cloud tools, cybersecurity, collaboration software—not pandemic winners like Peloton or Teladoc. Hydrogen as an emerging energy theme (Priority: 5/5): Hydrogen is presented as a long-duration, underdeveloped energy transition theme with applications in heavy transport, industrial uses, and global decarbonization. Moonshot ETF construction and philosophy (Priority: 5/5): Moonshot targets early-stage, R&D-heavy companies with a culture of innovation, using an index-based process to find potential future winners before they become large caps. Investor behavior, flows, and concentration risk (Priority: 4/5): The conversation covers how investors chase performance in thematic products, why these ETFs tend to be used as satellites, and why they should not replace broad-market core holdings.

Key Arguments: Thematic ETFs are not just sector funds with new labels; they aim to classify companies by shared economic and technological disruption rather than traditional industry buckets. The market’s recent obsession with applying fixed-income-style duration to equities is mathematically intuitive but likely too simplistic as a causal explanation for stock performance. Rising rates may have contributed to growth-stock weakness earlier in the year, but the rebound in some of those names while rates also rose shows the narrative is not a universal law. WFH should be defined by the tools and business models enabling remote work, not by the stocks that merely benefited from staying home during the pandemic. Hydrogen is a long-term transition theme with real industrial applications, especially in freight and heavy transport where battery weight and recharging constraints matter. Moonshot’s process intentionally sells companies as they graduate into larger caps so the portfolio can keep searching for the next stage of innovation. The best use case for these ETFs is as a small, deliberate satellite position layered on top of a diversified core portfolio. Retail investors and advisors are increasingly using thematic ETFs, but they are still more likely to be held for narrative exposure than for active sector rotation.

Data Points: Correlation between QQQ and 10-year Treasury rate in 2021: -0.9 - Ben cited YCharts showing a very strong negative correlation this year between Nasdaq 100 ETFs and the 10-year yield. Early 2000s interest rate move: 6.5% to 3% - Example used to show tech stocks can fall even when rates are declining. Early 2000s tech stock performance: -80% - Technology stocks fell sharply despite falling rates. 2016-2018 interest rate move: 1.4% to 3.2% - Example used to show tech stocks can rise despite rising rates. 2016-2018 tech stock performance: +60% - Technology stocks rose strongly while rates more than doubled. Manhattan office return expectation: 60% expected vs 36% actual - Dave referenced survey expectations versus actual return-to-office levels. Work-from-home ETF holdings count: 10 stocks - Dave said WFH is concentrated and built around 10 names from four areas. Hydrogen ETF holdings count: 30 stocks - The hydrogen ETF is designed as a concentrated basket of 30 companies. Moonshot ETF holdings count: 50 stocks - Dave described Moonshot as highly concentrated with 50 stocks. Hydrogen pure-play company count: 2 hands - Dave said there are very few true hydrogen pure-play companies.

Pivotal Quotes: "Thematic ETFs are really sort of the 21st version of traditional sectors." — Dave Mazza: He explained how thematic funds extend the ETF logic beyond standard sector and industry classifications. "I think the market is obsessed now with applying duration to equities." — Dave Mazza: He pushed back on the idea that long-duration analysis cleanly explains growth-stock behavior. "We weren't going out to try to build a COVID winner's basket." — Dave Mazza: He clarified that the WFH ETF targets long-term remote-work beneficiaries, not temporary pandemic trades.

Implications: Listeners should treat thematic ETFs as targeted, volatile satellites tied to structural trends, not core holdings. The episode suggests narratives like “rates kill growth” or “work-from-home winners” are useful but incomplete; portfolio construction and time horizon matter more.