Thematic Thursday: Rotation from Generic AI to Potential AI Winners

The latest thematic ETF flows show investors rotating within sectors rather than abandoning the market’s dominant investment themes.

The clearest shift is inside Information Technology. Capital is leaving the most crowded semiconductor and momentum strategies while continuing to enter software, cybersecurity and diversified artificial-intelligence funds. Similar distinctions are emerging elsewhere: investors prefer energy infrastructure over broad oil exposure, electrical-grid investment over broad clean energy, travel over housing, and defense over generalized infrastructure.

The message is not broadly defensive. It is increasingly selective.

Investors continue to support sectors tied to AI investment, power demand, geopolitical security and resilient consumer spending. But they are moving away from themes where valuations, positioning or financing requirements have become difficult to justify.

Sector Flow Scorecard

Aggregate category flows are calculated from the ETFs included in the August 6 thematic dataset. Sector and thematic exposures may overlap.

Information Technology: Investors Are Rotating Beyond the Chip Trade

Information Technology remains the most important battleground in thematic markets, but the composition of sector demand is changing.

Semiconductor ETFs experienced approximately $2.0 billion of net outflows during the latest week, led by roughly $1.73 billion of redemptions from SOXX and another $252 million from SMH. Those withdrawals came despite positive weekly returns and exceptionally strong longer-term demand: semiconductor funds remain positive by more than $10 billion over one month and $23 billion year to date.

The divergence suggests profit-taking, hedge-fund deleveraging and portfolio rebalancing—not a collapse in semiconductor fundamentals.

Sandisk and Western Digital both reported strong demand tied to AI data centers, memory and storage. Their shares nevertheless came under pressure because results and guidance did not exceed already elevated investor expectations. Contracted demand remains substantial, but the market is becoming less willing to reward companies simply for confirming an optimistic narrative.

This high expectations bar is colliding with a broader momentum unwind. Technology, media and telecommunications hedge funds suffered unusually large July losses, while reduced capacity among leveraged funds could limit their ability to rebuild large technology positions quickly.

Yet money is not leaving technology altogether.

Software ETFs attracted $606 million during the week, while Robotics and AI funds received $269 million. Investors appear to be moving up the AI value chain from hardware toward applications, automation and monetization.

DeepSeek’s planned price increase suggests Chinese AI developers may be shifting from aggressive discounting toward profit generation. Meta launched its first AI coding agent, and developers are investing in voice systems as another interface for autonomous agents. These developments support software and application-layer companies even as investors become more cautious about the capital intensity of the infrastructure buildout.

For the technology sector, the flow message is clear: AI remains investable, but investors increasingly want revenue conversion rather than capacity expansion alone.

Cybersecurity: AI Creates Its Own Defensive Growth Theme

Cybersecurity is also becoming a distinct source of technology-sector leadership.

Major cybersecurity ETFs collectively attracted approximately $493 million over one month, while all four primary funds in the dataset posted strong weekly gains. The flow trend is supported by a growing recognition that autonomous AI systems increase both productivity and security risk.

Iran-linked cyberattacks have targeted U.S. water utilities, while AI agents have reportedly accessed or exploited testing infrastructure during controlled development.
Cybersecurity therefore offers a different type of Growth exposure. Demand is recurring, spending is increasingly non-discretionary and the addressable market expands alongside AI adoption.

Industrials: Electrification and Defense Outpace Broad Infrastructure

Industrials continue to benefit from AI capital spending, defense demand and domestic manufacturing investment, but flows are becoming more targeted.

Electrification ETFs attracted $88 million over one week, $377 million over one month and $6.58 billion year to date. GRID accounted for most of the recent demand.

The allocation reflects growing investment in transmission equipment, electrical systems, power management and the grid infrastructure needed to support data centers. July manufacturing surveys highlighted strong demand from AI infrastructure, semiconductors, data centers and defense, although tariffs, shipping disruptions and energy costs remained inflationary pressures.

Broad infrastructure funds are showing weaker sponsorship. The category recorded $156 million of weekly outflows and $177 million over one month, although YTD inflows remain above $4.1 billion.

Investors appear to be distinguishing between generalized infrastructure exposure and companies directly connected to power demand and technology investment.

Aerospace and defense flows also improved, with the category attracting $106 million during the week after an essentially flat month. Continued Middle East tension, cyber risks and uncertainty around critical infrastructure support the sector’s long-term spending outlook.

Energy: Income Infrastructure Beats Commodity Exposure

The energy-sector message is increasingly divided between commodity producers and cash-generating infrastructure.

Legacy energy funds experienced $23 million of weekly outflows and $128 million over one month. By comparison, MLP funds attracted $333 million during the week and $451 million over one month, led overwhelmingly by AMLP.

Investors continue to value pipeline cash flows, distributions and energy-infrastructure exposure, but they appear less willing to add aggressively to exploration, production and oil-service companies while negotiations over the Strait of Hormuz continue.

Iran and Oman have reported progress toward an agreement in principle, while Saudi Arabia reduced crude prices to Asian customers. However, Iranian demands concerning shipping fees and the lifting of the U.S. blockade remain unresolved, and threats to regional energy infrastructure have not disappeared.

The flow picture is therefore consistent with a preference for income and infrastructure over outright oil-price beta.

Materials: Natural Resources Are Showing the Strongest Reversal

Natural-resource ETFs produced one of the most significant positive changes in this week’s data.

The category attracted $744 million over one week and $2.20 billion over one month, despite remaining negative by approximately $7.79 billion year to date. Gold, silver and copper-related funds accounted for most of the improvement.

The shift suggests investors are rebuilding exposure to inflation protection, geopolitical hedges and constrained physical supply after reducing those positions earlier in the year.

Unlike semiconductors, where weekly selling is moving against a strong YTD trend, natural resources are experiencing the opposite transition: recent buying is beginning to reverse a deeply negative YTD flow picture.

This is an early change rather than a confirmed long-term trend, but it is one of the more important developments to monitor.

Consumer Discretionary: Travel Improves While Housing Remains Weak

Consumer flows show investors favoring experiences and services over interest-rate-sensitive purchases.

Travel ETFs attracted $120 million during the week, reversing their negative one-month trend. JETS and PEJ accounted for most of the inflows.

The corporate backdrop remains supportive. Expedia raised its revenue outlook, DoorDash reported stronger subscriber growth and restaurant orders, and eBay delivered better-than-expected sales and merchandise volume.

Housing and automobile funds remain under pressure, losing $122 million during the week and $822 million over one month. Elevated mortgage rates, weak housing affordability and uncertainty around employment growth continue to restrain demand.

July ADP payroll growth slowed to 44,000, while the ISM Services employment index moved back into contraction. At the same time, services inflation remained elevated, limiting the likelihood of immediate interest-rate relief.

The consumer is still spending, but investors are avoiding the areas most dependent on financing costs.

Communication Services: The News Is Improving Faster Than the Flows

Communication Services remains a sector where the fundamental narrative and ETF positioning have not yet converged.

Internet and metaverse funds experienced $141 million of weekly outflows, $150 million over one month and nearly $3 billion year to date. Investors remain cautious toward broad internet exposure despite improving interest in AI applications, Chinese technology platforms and digital advertising.

Lower-cost Chinese AI models are increasing competition with U.S. frontier systems, while DeepSeek’s move toward higher pricing could signal improving monetization. However, cybersecurity incidents, regulatory uncertainty and doubts about AI economics continue to restrain investor enthusiasm.

The news flow is becoming more constructive, but ETF flows have not yet confirmed a durable turn.

Clean Energy: Policy Support Still Has Not Produced Investor Demand

Clean-energy ETFs remain one of the weakest areas of thematic positioning.

The category experienced $247 million of weekly outflows and $485 million over one month, while YTD flows remain slightly negative. ICLN accounted for most of the latest withdrawals.

Proposed tariffs and price floors on imported polysilicon, wafers, solar cells and modules could support selected domestic producers, but they may also increase project costs and complicate supply chains.

Investors continue to prefer electrical infrastructure and grid-equipment companies over broad renewable-energy portfolios. That distinction separates companies benefiting immediately from rising power demand from those still dependent on policy support, financing conditions and future project economics.

Where Sector Flows Remain Consistent

The most durable sector signals are concentrated in software, diversified AI, cybersecurity, electrification and MLPs. These themes have attracted capital across the one-week, one-month and YTD periods.

Each has a visible fundamental catalyst:

Software is benefiting from AI commercialization.

Cybersecurity demand is becoming increasingly non-discretionary.

Electrification is supported by data-center and grid investment.

MLPs provide income and energy infrastructure without requiring higher oil prices.

Persistent weakness remains concentrated in clean energy, internet and metaverse strategies, housing and automobiles, and blockchain-related exposure. In these areas, improving headlines have not yet translated into sustained investor demand.

Where the Sector Flow Picture Is Changing

The most important negative change is inside Information Technology, where semiconductor redemptions are moving sharply against still-strong monthly and YTD inflows.

The strongest positive reversal is in Materials, where precious metals and copper funds are attracting meaningful capital after heavy YTD withdrawals.

Consumer Discretionary is also becoming more selective, with travel improving while housing remains weak.

Within Industrials, electrification and defense are holding investor attention while broad infrastructure exposure loses momentum.

These shifts show a market moving from broad thematic allocations toward narrower sector and industry exposures with clearer earnings, cash-flow or geopolitical support.

The Bottom Line

Recent thematic etf flow data shows clear investor demand for fundamental confirmation of previously speculative themes.  Risk appetite is not open ended, but there is recognition that the AI trade still holds the largest potential to catalyze Growth.

Within Technology, money is rotating from semiconductors and crowded momentum exposure toward software, cybersecurity and diversified AI. Within Industrials, electrification and defense are outperforming broad infrastructure. Within Energy, MLPs are attracting capital while traditional energy funds experience redemptions. Within Consumer Discretionary, travel is improving while housing remains under pressure.

The dominant investment themes—AI, power demand, security, geopolitical risk and consumer resilience—remain intact. But investors increasingly prefer companies capable of translating those themes into current revenue, recurring cash flow and visible demand.

Thematic leadership is not disappearing. It is becoming more selective—and more sector-specific.

Sources

• August 6, 2026 thematic ETF return and flow dataset.
• News flow sourced from Reuters & FactSet Research Systems Inc.
• Corporate earnings, AI, energy, trade and economic developments sourced from FactSet Research Systems Inc.
• Consumer, industrial and technology corporate updates.
• July ISM, ADP and related economic data.

Disclaimer:  This commentary is for informational purposes only and does not constitute investment advice, an offer to sell or a solicitation to purchase any security. ETF holdings, prices, flows and thematic exposures can change. Investors should consider objectives, risks, charges and expenses before investing.