The investment landscape has experienced a significant transformation in recent years, marked by the number of exchange-traded funds (ETFs) on U.S. exchanges now exceeding that of individual stocks.
Currently, approximately 4,630 ETFs are available compared to around 4,200 individual stocks. These funds amalgamate investors’ resources to offer a variety of securities, such as stocks, bonds, or commodities, enabling either broad or specific exposure to various sectors, indices, or investment themes. ETFs typically feature lower fees and enhanced liquidity compared to mutual funds, which boosts their attractiveness among retail investors.
This trend has simplified the ability to leverage thematic ETFs, allowing investors to engage with emerging market trends.
Kevin Grogan, chief investment officer of systematic strategies at Focus Partners, notes, “Some of these ETFs have been sliced pretty [specifically] in terms of what the underlying exposure is. For investors that want an active tilt towards specific sectors, it’s good to have those options available.”
AI Data Center Infrastructure ETFs
The rise of artificial intelligence (AI) has become a global phenomenon. Identifying potential market leaders in this sector can be challenging. Thematic ETFs enable investors to exploit structural changes corresponding with AI’s rapid expansion, particularly the significant demand for data center infrastructure.
Though stocks associated with the “Magnificent Seven” and dedicated AI companies often garner the most attention, the need for the necessary physical and digital facilities to facilitate AI growth has emerged as a major trend. According to Grand View Research, the data center infrastructure management market is projected to expand at a compound annual growth rate of 19.5% from 2026 to 2033.
This trend offers numerous investment opportunities in companies supplying essential equipment and services for a thriving industry. For instance, the Global X Data Center & Digital Infrastructure ETF (DTCR) focuses on data center operators, real estate investment trusts, and digital infrastructure hardware firms, making it easier for investors to incorporate this trend into their portfolios.
Grogan advises investors to be cautious with their allocations, suggesting that thematic ETFs should be part of a comprehensive investment approach. “We would advise to not look at any investment in isolation,” he emphasizes. “You want to consider how adding something to your portfolio will affect [it] overall.”
Gartner forecasts that global spending on data centers will exceed $650 billion in 2026. VP analyst John-David Lovelock highlighted that “AI infrastructure growth remains rapid despite concerns about an AI bubble, with spending rising across AI-related hardware and software.”
The performance of the DTCR ETF has been notable, with a 25% increase this year and a 79% rise over the past year, in contrast to the S&P 500, which has risen only 4% this year and 33% over the past year. Although thematic ETFs should not dominate long-term portfolios, the DTCR illustrates their potential for hedging against broader index underperformance.
Energy ETFs
The ongoing conflict in Iran and the closure of the Strait of Hormuz have led to unprecedented surges in oil and gas prices. Such escalating prices were so dramatic that even with a potential ceasefire, inflation at the pump is unlikely to significantly decrease soon.
Mark Zandi, chief economist at Moody’s Analytics, previously explained that gas prices tend to “rise like a rocket and fall like a feather.”
On Friday, Iran announced the reopening of the Strait amidst another ceasefire between Israel and Lebanon, which could provide temporary relief. However, higher prices are anticipated to persist due to the considerable damage inflicted on energy infrastructure during the conflict.
With ongoing global supply limitations, energy ETFs may continue to benefit from potential price increases post-ceasefire. According to the International Energy Agency’s Oil Market Report, “demand destruction will spread as [oil, natural gas and jet fuel] scarcity and higher prices persist.” The report also mentions that resuming shipping through the Strait of Hormuz “remains the single most important variable in easing the pressure on energy supplies, prices, and the global economy.”
Despite the price relief from resumed shipping through the Strait, oil remains approximately 28% higher than its value when the conflict began. This trend favors energy ETFs like the Vanguard Energy ETF (VDE), which includes major integrated oil companies such as ExxonMobil, Chevron, and ConocoPhillips. This fund saw a 38% gain earlier this year, although analysts suggest potential for further double-digit increases in the upcoming year.
Small-Cap ETFs
Major companies like Nvidia have grown so large that they dominate the capitalizations of leading indices. As a result, approximately 38 cents of every dollar invested in an S&P 500 index fund is allocated to just the top 10 stocks, leaving the remainder for the remaining 490 companies. Moreover, market-weighted large-cap funds do not provide access to smaller companies that may offer higher returns.
The Russell 2000 index, composed of 2,000 small-cap U.S. companies, has shown an 11% gain compared to the S&P 500’s 4% rise, and has achieved a 48% gain over the past year versus the S&P 500’s 35% return.
While Russell 2000 index funds can give broad exposure to small-cap stocks, investors may still encounter more expensive or lower-quality companies. Grogan suggests a focused approach for small-cap investments. Actively managed funds, like those from Bridgeway Capital Management, that specifically target value opportunities tend to deliver better results.
For instance, the actively managed EA Bridgeway Omni Small-Cap Value ETF (BSVO) has recorded a 16% increase this year and a 54% rise over the past year, achieved by pinpointing underpriced small-cap stocks based on their financial metrics.
While such returns have been beneficial, Grogan warns that investing in small-cap stocks should ideally follow a long-term strategy. “Five, 10-plus years out, I would expect smaller-cap and more value-oriented companies to outperform,” he remarks. “But over shorter horizons, [returns] are just too noisy to make really accurate predictions.”