Beyond the Tech Horizon: Real Diversification in Non-AI Thematic ETFs

Artificial intelligence remains a compelling long-term secular trend. However, growing market scrutiny surrounds AI. Massive capital spending and deferred monetization timelines raise risks impacting ETFs. For example, the Roundhill Memory ETF (DRAM) was down sharply in October. To build resilient portfolios, investors should also be focused beyond the technology sector for thematic exposure.Diversification requires looking under the hood. Investors must ensure new allocations do not fully duplicate existing holdings. Broad sector ETFs can help investors overweight exposure to consumer discretionary, energy, industrials, and other market segments. However, holdings data reveals how targeted thematic ETFs can provide unique exposures. They enhance portfolio breadth without heavily duplicating what is already owned by an investor via the S&P 500.Key Takeaways AI remains a dominant theme, but infrastructure costs have created market volatility. Investors can diversify into non-tech themes. The Alerian MLP ETF (AMLP A-) owns fee-based midstream energy infrastructure companies. The ETF has a 0% overlap with the S&P 500 Index. Investors looking for thematic exposure to defense investing should focus on targeted ETFs like the Invesco Aerospace & Defense ETF (PPA A-). The ETF has 61% of its assets in its top-10 holdings. Evaluating Holdings & Overlap: Broad Sectors vs. Targeted ThematicsOne of the benefits of investing in ETFs is the ability to look inside a portfolio. By analyzing an ETF’s composition, an investor can understand what they own and do not own. Many sector ETFs, including those offered by State Street Investment Management, are market cap weighted and provide exposure to multiple industries. Meanwhile, some thematic ETFs look very similar to sector ETFs, but others are offering vastly different exposures.1. Alerian MLP ETF (AMLP A-) — Zero Overlap With Core EnergyAccording to VettaFi, AMLP has 0% overlap with the State Street Energy Select Sector SPDR ETF (XLE A). XLE owns S&P 500 energy holdings in a market cap approach. As such, the fund is heavily exposed to integrated oil majors. ExxonMobil (XOM) (24% of assets) and Chevron CVX (18%) make up a significant portion of the assets. Conversely, AMLP concentrates exclusively on fee-based midstream infrastructure MLPs. The ETF’s top positions include Enterprise Products Partners (EPD), Plains All American Pipeline (PAA), and Sunoco (SUN). These names are absent from XLE allowing AMLP to offer exposure to a complementary part of the energy sector. One that is focused on companies generating strong free cash flow to pay dividends and repurchase shares.2. Amplify Online Retail ETF (IBUY C+) — Targeted Digital CommerceThe State Street Consumer Discretionary Select Sector SPDR Fund (XLY A) provides broad market consumer exposure. Top holdings like Amazon (AMZN) (24%) and Tesla (TSLA) (18%) dominate XLY. However, IBUY shares just a 15% overlap with XLY. Amplify’s IBUY uses a modified equal-weighted methodology across 82 holdings. In contrast, XLY holds only 48 companies. IBUY captures pure-play e-commerce platforms and digital service enablers, including Wayfair (W) (3.8%) and Etsy (ETSY) (3.0%). The thematic ETF also allocates to Amazon but the 2.2% weighting is much smaller than in XLY.3. Invesco Aerospace & Defense ETF (PPA A-) — Concentrated National SecurityThe State Street Industrial Select Sector SPDR Fund (XLI A) blends many industries and owns defense contractors and machinery giants like Caterpillar (CAT). XLI also holds railroad and commercial transport companies such as Union Pacific (UNP). Meanwhile, PPA focuses specifically on aerospace and national defense platforms. This results in a 28% overlap with XLI. PPA concentrates 61% of its capital in its top 10 positions. In contrast, XLI holds 39% in its top 10. It gives higher-conviction weight to defense companies including Boeing (BA), GE Aerospace (GE), Lockheed Martin (LMT), and RTX Corporation (RTX). For investors who view national security as a global theme, a targeted approach is key.Building a Balanced Thematic CoreAt a VettaFi NASDAQ Asset Allocation Summit last week, many investors shared their enthusiasm for adding exposure to thematic ETFs before year end. While the technology sector offers many thematic opportunities, consumer discretionary, energy, and industrials do too. However, to build a diversified portfolio, it is important to ensure to look at the exposure. Targeted funds like AMLP, IBUY, and PPA capture long-term secular growth trends but in a complementary manner to the S&P 500. For more news, information, and analysis, visit the Thematic Investing Content Hub. VettaFi LLC (“VettaFi”) is the index provider for AMLP, IBUY, and PPA, for which it receives an index licensing fee. However, AMLP, IBUY, and PPA are not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of AMLP, IBUY, and PPA.