Star-Powered ETFs Are Luring Investors. But a Big Name Doesn’t Guarantee Big Returns.

The Dan Ives Wedbush AI Revolution exchange-traded fund has $960 million in assets. Above, Ives in September. (Tasos Katopodis/Getty Images for Eightco Holdings and BitMine )

Key Points

• The Dan Ives Wedbush AI Revolution ETF and Fundstrat Granny Shots U.S. Large Cap ETF have attracted $880 million and $3.7 billion in assets, respectively.
• The Ives fund is up 13% over three months, while the Granny Shots fund is up 20.3% over one year, both outperforming broader benchmarks.
• Thematic and star-powered ETFs are becoming more common, but a 2022 study found that specialized ETFs lose about 30% of their risk-adjusted value in five years.

What’s in a name? For two exchange-traded fund issuers, a way to stand out in a crowded field and gather significant assets.

Nearly six months after its debut, the Dan Ives Wedbush AI Revolution ETF—named after the widely followed Wedbush technology analyst known for his bullish calls and frequent media appearances—boasts $960 million in assets.

Meanwhile, Fundstrat Granny Shots U.S. Large Cap has $3.8 billion in its coffers, 13 months after popular Wall Street strategist Tom Lee, Fundstrat’s chief investment officer and head of research, launched the ETF.

With more than 4,000 ETFs available and dozens launching daily, most ETFs are considered successful if they attract $100 million in assets. Hoovering up nearly a billion or more suggests star power—and a hot market—is behind the ETFs’ explosive growth, says Rick Wedell, chief investment officer at RFG Advisory.

Buyers seem to be drawn by the names and are staying for the performance. Albeit having a short comparable record of three months, the Ives fund is up 13%, versus 9.2% for the Technology Select Sector SPDR ETF. The Granny Shots fund is up 20.3% on a one-year basis, beating the S&P 500 ’s 14.8% return.

The Ives fund is a thematic index fund based off the Dan Ives AI 30, a list of his 30 best ideas and names across the artificial-intelligence ecosystem. Although structured as an index fund with quarterly rebalancing, Wedbush will update the holdings if Ives changes his list, giving it an active tilt, says Cullen Rogers, the firm’s chief investment officer.

Making it an index fund allows Ives to focus on research, rather than portfolio management. That leverages Ives’ skill, Rogers says, “as opposed to putting him in a different seat and asking different questions.”

The Ives fund overlaps other tech indexes, with holdings such as Nvidia and Microsoft, but Rogers says the broader tech indexes don’t own lesser-known names such as nuclear energy company Oklo and IT company Zscaler that could produce future outsize returns. “Those could be the next Nvidia,” he says.

The Granny Shots fund, whose name refers to someone making an underhanded basketball free-throw shot, is a large-cap blend fund actively managed by Lee and three other portfolio managers. It’s based on a core list of names culled from Fundstrat’s thematic research on long-term “supercycle” trends, which they believe can improve stock earnings.

The fund targets three short-term themes, such as seasonality, with four longer-term themes, including energy/cybersecurity and millennial preferences. Stocks need to align with at least two themes to be included. Holdings include Microsoft, CrowdStrike Holdings, and Monster Beverage.

Thematic funds often are narrowly focused on a single theme or target a trend. Lee says Granny Shots differs from typical thematic funds with its multiple themes and longer-term focus. “It’s the opposite of [trendy]. That’s why it’s called a granny shot,” he says. “We’re not trying to make cool shots. We’re trying to make shots that go in.”

Deborah Fuhr, founder of independent research firm ETFGI, says both Ives’ and Lee’s funds benefit from current thematic tailwinds and large-cap growth outperformance. Lee’s fund, with its multithemed holdings in AI, energy security, and cybersecurity, “is kind of in the sweet spot right now in terms of performance,” she says.

Star-powered ETFs aren’t new. One of the earliest was Pimco’s ETF version of its Pimco Total Return fund, which launched in 2012 and leaned on then-manager Bill Gross’ name to draw attention, Fuhr says.

More recent ETF launches by well-known investors include O’Shares ETFs, a suite of funds that follow factor-based indexes from Kevin O’Leary of Shark Tank fame, and ETFs issued by Strive Asset Management founder and biotech entrepreneur Vivek Ramaswamy, which were originally marketed as being “anti-woke.” He has since left the firm to run for various political offices.

Big names aren’t always a draw. The Atlas America ETF launched by Nouriel Roubini has only $18 million in assets. Nor do star-powered funds always succeed: U.S.-based ETFs from commodities trader Jim Rogers were delisted, as was an ETF from YouTube financial personality Kevin Paffrath.

Actively managed thematic funds with star managers can be subject to volatile performance. A prime example is Cathie Wood’s $7.8 billion ARK Innovation ETF. It is up 37% in the past year but has lost 6.2% on an annualized five-year basis. The fund gained 152.8% in 2020 but lost 23.4% in 2021 and 67% in 2022, according to Morningstar.

Compared with plain-vanilla index funds, thematic and actively managed ETFs tend to have higher fees, which Fuhr says are a drag on performance. That said, Ives’ and Lee’s funds each cost 0.75% annually to own, but they are outperforming broader indexes net of fees.

Whether the outperformance lasts remains to be seen. S&P Global research shows that at least 80% of actively managed equity funds underperformed their benchmarks over the past 10 years after deducting fees.

The market cycle may turn, which could make some strategies underperform. However, Lee says since Fundstrat started its research list of its best investment ideas in 2019, the names they’ve selected outperformed the S&P 500 annually, including in 2022, by losing less in that down year.

Fuhr and Wedell say the popularity of these two funds also says something about the ETF industry as much as the strategies themselves. Asset managers are embracing ETFs for their tradability and tax efficiency, and investors are buying active ETFs.

It’s relatively cheap to launch an ETF, but it’s hard for issuers to get them distributed to major brokerages, so they need other methods to grab attention, Fuhr says. As such, investors should expect to see more thematic and star-power funds come to market.

Among the ETFs launched by financial celebrities, there are those that have serious strategies and others that are just a way to grab attention, Wedell says.

As more buzzy ETFs arrive, investors need to tread carefully. A 2022 study about attention-grabbing ETFs, focusing on thematic funds, showed that in the first five years after launch, specialized ETFs lose about 30% of their risk-adjusted value.

Francesco Franzoni, a professor at USI Lugano and the Swiss Finance Institute who contributed to the study, says three main features hurt performance: overvalued holdings as the fund managers chased trends, a lack of diversification, and higher fees.

Write to editors@barrons.com