THE ETERNAL SOVEREIGN

Category: ETFs

  • War Has Shifted Market Leadership Back to Traditional Industries — But Will It Last?

    The conflict in Iran has reshaped expectations about which sectors will benefit or struggle in the U.S. stock market, steering investment toward energy, materials, and industrial companies. How long this shift in market leadership continues will largely depend on the war’s trajectory and duration. For now, however, traditional “old-economy” stocks have regained popularity among investors.

    Rising oil and natural gas prices have propelled energy stocks to the top of sector performance rankings. According to ETF data through yesterday’s close (March 4), the Energy Select Sector SPDR Fund has climbed more than 25% so far this year. In comparison, the broader market, represented by the SPDR S&P 500 ETF Trust, has delivered almost no growth, posting only a modest gain of about 0.5% in 2026.

    Materials and industrial stocks rank a distant second and third in sector performance this year, followed by consumer staples, utilities, and real estate. Most of the other sectors are either hovering around flat levels or showing losses. Financials have performed the worst so far, declining about 6% since the start of the year.

    However, this shift in investor sentiment may not last long, depending on how the conflict develops. Many analysts believe the war could end relatively soon. If that happens, today’s leading sectors might give up their gains as investors rotate back toward themes tied to artificial intelligence and the digital economy.

    That outcome remains uncertain. The joint U.S. and Israeli strike on Iran has already proven to be more than a swift, targeted operation. With the conflict now entering its fifth day, the chances of a near-term resolution appear increasingly slim.

    Both the United States and Israel have indicated publicly that the conflict could extend for several weeks and may even become a prolonged war. On Wednesday, senior Pentagon officials cautioned that the situation could evolve into a longer confrontation, stressing that the fighting is “far from over.” U.S. Defense Secretary Pete Hegseth suggested the conflict might continue for up to eight weeks.

    A senior Israeli military officer echoed this view, noting that preparations are being made for a conflict that could last several weeks.

    How long the war continues will be a crucial factor shaping investor risk appetite and the direction of financial markets. According to Rick de los Reyes, a sector portfolio manager at T. Rowe Price, if disruptions prove brief, past experience shows that price spikes driven by geopolitical tensions often fade once uncertainty subsides. However, if production or exports are disrupted for an extended period, it could create a genuine supply shock with significant consequences for inflation, interest rate expectations, and global economic growth.

    As a result, the outlook for inflation, economic activity, interest rates, and which sectors lead or lag in markets remains highly uncertain. For now, the only clear reality is that no one knows how the conflict will develop or where it will ultimately lead. While several scenarios appear plausible on paper, the eventual outcome will likely challenge many of today’s predictions once the fighting ends.

    Sources: James Picerno

  • Why Prediction Markets Pose a Threat to Thematic ETF Providers

    Trump has effectively set off a regime change in Venezuela. The Monroe Doctrine has suddenly become relevant again. A special forces mission in Caracas plays across social media, Nicolás Maduro is taken into U.S. custody to face trial, and Washington declares it will run the country temporarily. No lives are lost. Global attention immediately focuses on Venezuela’s massive oil reserves, drawing in major energy companies.

    Overnight, ETFs respond predictably. Defense-related funds soar, while oil services ETFs rally on expectations of rebuilding, drilling, and upgrading energy infrastructure.

    Initially, that seems reassuring for ETF providers. Thematic and sector-based strategies still appear to “work.” Despite elevated fees, retail investors’ chronically bad timing, and the tendency for funds to debut right at the top of market themes, money still pours in when major geopolitical shocks occur.

    But here’s the difficult reality. By 2026, issuers who depend on thematic ETFs will face a much tougher landscape. Not because their products stop being relevant, but because a newer, more direct alternative is quietly overtaking them: Prediction markets.

    I say this frankly as someone inside the ETF business who is seeing investor habits evolve in real time, particularly among those under 30. Across social platforms, younger millennials and Gen Z investors are bypassing thematic ETFs entirely and placing their macro bets through prediction markets instead.

    Understanding Prediction Markets

    A prediction market is a marketplace where people buy and sell contracts based on the outcome of a clearly defined event. These contracts usually pay out either $1 if the event happens or $0 if it doesn’t. Their prices move beforehand as expectations change.

    Polymarket and Kalshi are currently two of the biggest platforms. Although their legal frameworks and back-end systems vary, they function in much the same way. Users can trade contracts on issues such as whether a government decision will be made, if interest rates will be reduced by a set deadline, or whether a geopolitical conflict will intensify. When the result is known, the contracts settle automatically.

    Most of these platforms operate with or alongside crypto, enabling fast account setup, funding, and settlement. More significantly, they remove extra layers of indirection. Instead of buying securities that represent a theme, users wager directly on the outcome of the event itself.

    Why Prediction Markets Could Undermine Thematic ETFs

    Prediction markets react much more aggressively to fresh information. When a development raises the likelihood of a given outcome, contract prices can jump by double digits within moments. That speed and sensitivity is a major draw for investors.

    In the Venezuela scenario, markets tied to potential U.S. intervention rallied far more dramatically than any defense or energy-themed ETF—even those offering multiple layers of leverage. ETFs spread exposure across many companies, balance sheets, and indirect impacts. Prediction markets offer pure exposure to a single event.

    Thematic ETF investing, by contrast, requires multiple steps of inference. You begin with a headline. You estimate which sectors might benefit. You choose the companies with the most relevant exposure. You locate an ETF with a reasonable basket, verify fees and trading volume, and then hope the broader market validates your thesis.

    Prediction markets compress that whole decision chain into a single action. You find the contract and place your bet. The outcome may be all-or-nothing, and the pricing is constantly arbitraged, but the simplicity is the appeal. They make sense instantly. Gen Z especially gravitates toward speed, transparency, and the freedom to get in and out of a position without digging through fund disclosures, holdings breakdowns, or factor metrics.

    The Outlook for Thematic ETF Strategies

    This isn’t a death notice for the category. I don’t believe sector ETFs are disappearing. Low-cost, market-cap sector funds—especially those priced below 10 basis points and spanning the 11 GICS sectors—will continue to serve as essential asset-allocation building blocks.

    Major thematic ETFs should also endure. Products with over $1 billion in assets have the size, trading depth, and embedded capital gains that tend to keep investors from exiting. Momentum still works in their favor.

    Where the real pressure shows up is at the edges. Smaller thematic products—particularly those with less than $50 million, along with brand-new funds launched to chase the latest storyline—are entering a very tough competitive landscape. Their rivals are no longer just other ETFs. They’re up against prediction markets that provide quicker, simpler, and more emotionally direct ways to express a macro belief.

    If you’re running an ETF business, now might be the moment to tap the brakes. The old playbook—rolling out a stream of hyper-niche thematic funds and hoping a few gain traction—looks much less sustainable in 2026. With retail investors tiring out, fees getting squeezed, and prediction markets gaining momentum, the “launch everything and see what works” model is hitting some real limits.

    Sources: Investing