Investors Seek Non-AI Thematic ETFs for Diversification

Artificial intelligence (AI) remains a compelling long-term secular trend, but market scrutiny is growing around AI-related ETFs due to massive capital spending and deferred monetization timelines. The Roundhill Memory ETF (DRAM) recently posted sharp losses, highlighting volatility risks. To build resilient portfolios, investors may benefit from thematic exposure outside the technology sector.

Diversification Beyond AI

Looking beyond tech requires examining ETF compositions to avoid duplicating existing holdings. Broad sector ETFs can tilt exposure to consumer discretionary, energy, and industrials. However, targeted thematic ETFs often provide unique access to secular trends without heavy intersection with the S&P 500.

The Alerian MLP ETF (AMLP) focuses on fee-based midstream energy infrastructure companies. It holds zero percent common holdings with the S&P 500 Energy Select Sector SPDR (XLE), which is dominated by integrated oil majors like ExxonMobil (24% of assets) and Chevron (18%). AMLP’s top holdings include Enterprise Products Partners (EPD), Plains All American Pipeline (PAA), and Sunoco (SUN), offering complementary energy exposure.

The ETF has a 0% overlap with the S&P 500 Index, ensuring investors do not duplicate broader market energy holdings. Additionally, AMLP is structured to focus on companies generating strong free cash flow to pay dividends and repurchase shares, enhancing its appeal for income-oriented investors. These midstream companies specialize in the transportation, storage, and distribution of energy commodities, generating stable fee-based revenues that support consistent payouts.

Evaluating Holdings & Overlap

Analyzing ETF holdings helps investors understand their true exposure. While many sector ETFs use market-cap weighting, thematic funds vary. The Amplify Online Retail ETF (IBUY) contrasts with the State Street Consumer Discretionary Select Sector SPDR Fund (XLY). XLY’s top holdings include Amazon (24%) and Tesla (18%), whereas IBUY uses a modified equal-weighted methodology across 82 holdings, capturing pure-play e-commerce platforms like Wayfair (3.8%) and Etsy (3.0%), with a 15% shared holdings with XLY. In contrast, XLY holds only 48 companies, emphasizing a concentrated approach compared to IBUY’s broader diversification. The thematic ETF also allocates to Amazon but the 2.2% weighting is much smaller than in XLY, reflecting a distinct focus on e-commerce specialists rather than diversified retail giants.

The Invesco Aerospace & Defense ETF (PPA) focuses on aerospace and national defense, sharing 28% of its portfolio with the State Street Industrial Select Sector SPDR Fund (XLI). PPA concentrates 61% of its assets in its top 10 positions, including Boeing (BA), GE Aerospace (GE), Lockheed Martin (LMT), and RTX Corporation (RTX). These defense and aerospace leaders represent key players in innovation and national security infrastructure. XLI, by contrast, spreads its top 10 holdings across industries like machinery and transportation. XLI holds 39% in its top 10, reflecting a more diversified approach compared to PPA’s concentrated 61% allocation, which prioritizes defense-specific exposure over industrial diversification.

Building a Balanced Thematic Core

At a recent VettaFI NASDAQ Asset Allocation Summit, investors expressed interest in adding thematic ETF exposure before year-end. While technology offers numerous themes, consumer discretionary, energy, and industrials provide opportunities for diversification. Funds like AMLP, IBUY, and PPA capture long-term trends in energy infrastructure, digital commerce, and defense, respectively, complementing S&P 500 holdings.

A critical step in portfolio construction is ensuring allocations do not replicate existing exposure. For example, AMLP’s zero intersection with XLE allows investors to access midstream energy without duplicating integrated oil majors. Similarly, IBUY’s smaller Amazon weighting compared to XLY provides focused exposure to e-commerce platforms. PPA’s concentrated defense positioning offers a targeted approach for investors prioritizing national security themes.

The VettaFI NASDAQ summit highlighted enthusiasm for thematic ETFs amid market volatility. By selecting funds with low intersection with core holdings, investors can enhance portfolio resilience. AMLP’s focus on midstream infrastructure, IBUY’s emphasis on e-commerce platforms, and PPA’s defense orientation exemplify how targeted ETFs can complement a diversified core.