Post by Joseph Mezrich

The problem with ETFs Are ETFs the best way to invest in a macro-based idea? In a recent Financial Times article, Rana Foroohar highlighted Jay Pelosky’s thesis that the global economy is entering an investment super-cycle driven by artificial intelligence, clean energy, and defense spending. AI’s demand for power infrastructure, combined with the reshoring of critical supply chains, creates a compelling macro investment theme. If you agree with this thesis, how would you invest in it? Would you use ETFs? A new way to approach this exercise for macro themes is to use Finsera's AI-powered platform for thematic investing. I used the following prompt to interpret the thesis and asked for a 25-stock portfolio with historical performance. The platform also identified relevant ETFs as alternatives to the stock portfolio. The AI Prompt: "Companies in this theme focus on the AI energy buildout by directly monetizing natural gas reserves, pipeline capacity, and electrical engineering CapEx. Rather than treating AI power demand as an isolated technology trend, this framework aligns with the thesis that we are at the beginning of a multi-sector investment super-cycle in which AI infrastructure, clean energy, and manufacturing sovereignty are structurally reinforcing one another. By shifting beyond speculative technology layers, this approach captures the physical fixed capital assets required to support massive data center clusters, leveraging the fee-based, volume-driven stability of midstream networks and the immediate deployment of localized, 'behind-the-meter' power generation to bypass grid interconnection bottlenecks." The Finsera platform identifies stocks that most closely match the prompt's content by analyzing companies' 10-Ks and earnings calls. As new corporate information is released, the stock portfolio is updated. The theme's portfolio performance has been very strong. The annualized return has been 47% over the past three years and 85% over the past year (as of July 14). The Finsera platform identifies six ETFs whose holdings overlap with the theme basket. The greatest overlap is with the UMI ETF (USCF Midstream Energy Income Fund), which shares eight stocks with the theme basket’s twenty-five. However, these eight stocks account for only 48% of UMI’s market capitalization. Therefore, UMI’s performance will not track the theme basket’s return. No ETF captures the scope of what the theme basket offers, since each ETF looks at only a narrow slice of the theme’s richness. Moreover, none of the ETFs comes close to matching the theme portfolio’s performance, as shown in the chart here. That means a combination of ETFs would not match the theme basket’s performance. Macro themes deserve more than off-the-shelf ETFs. AI-driven portfolio construction offers a more direct way to build a portfolio around the investment thesis. #ThematicInvesting, #ArtificialIntelligence