Theme ETFs promise simple access to future trends-but reality shows a higher risk than many investors suspect. (Photo: Freepik, @Italoparnaiba5)
In the past 10 years, investors have increasingly found interest in themed. Such funds rely on long -term trends or topics that represent a market niche. In this way, investors can cover an entire trend in the portfolio without directly putting on individual shares. For investors, an ETF looks less risky than a single investment. What are the opportunities and risks with topic ETFs?
The error of broad theme scatter
It is like the broad world ETFs: A topic ETF does not require a company analysis at first glance. But at second glance, such an assessment can turn out to be an expensive mistake. One example would be the ishares Global Clean Energy ETF. He made his debut in 2007 and collapsed in the financial crisis in 2008. Nevertheless, the ETF was not closed. Interest in this theme ETF came back in the Corona crisis in 2020.
The ETF tripled until the beginning of 2021, driven by a massive concentration in Plug Power, Inc.a fuel cell manufacturer whose course has tenfold during this time. Investors have not observed or questioned the quality or evaluation of this company. As an unprofitable company, however, it was only a matter of time before this bubble burst. In a short time, investors lost 30 percent of the value.
Today, the discount to the highest level is 67 percent, although ETF is now composed of completely different values. Plug Power can no longer be found in the top 10. Theme ETFs should always be checked in terms of positions. Companies that are very weighted and do not make profits should be heavily questioned.
High fees and lack of performance
Investors should be aware that thematic ETFs cause significantly higher costs compared to broad-based world ETFs. Studies show that on average they demand about three times the fees. Another essential risk is the often low spread of investments – many of these funds rely on a handful of selected companies, which makes it more susceptible to price fluctuations.
If you look at the development over a period of 15 years, a sobering picture shows: only 15 percent of the themed ETFs did better than the global market, while 24 percent performed poorly. Around two thirds of the funds were even fully stopped over time – mostly due to disappointing results or a lack of demand.
The starting point in topic ETFs
A recurring problem with themed ETFs is above all the time to start many investors. Theme ETFs are usually only offered when the trend is already in the corridor and the courses of the corresponding shares have already increased. This significantly increases the risk of subsequent course corrections.
In addition, it shows again and again that supposed future topics either turn out to be overestimated or are not yet mature enough. A good example is genomics: it is considered a promising growth area in the long term, but there is still a lack of tangible results.
When theme-ETFs can work
Theme ETFs should be chosen with caution. Nevertheless, they offer the option of investing in a basket of stocks of a trend. One possibility would be to weight such ETFs similar to individual shares in the portfolio – i.e. with a limited admixture.
When selecting the ETF, it is important to rely on topics that exist in the medium to long term and are not just subject to a very niche-like hype such as hydrogen technology. Topics with pure future visions should also be avoided.
A certain fund volume should also be ensured due to the tradability. An established provider also increases trust in the theme ETF. Nevertheless, investors should also check the positions in the ETF themselves. A fundamental understanding of the companies contained therein helps to evaluate whether the topic ETF actually corresponds to the investment goal.
Since theme ETFs are associated with higher fees, a corresponding return should also be expected. Especially with long -term investment, the costs are a decisive factor for overall performance.
Topic ETFS: Conclusion
A large proportion of themed ETFs will be discontinued over time due to the lack of demand or poor performance. In the long term, only around 15 percent of these themed ETFs were able to achieve an outstanding on the broad market. The risk of loss in topic ETFs is therefore as high as with Investments in individual shares. The same applies to volatility. It is not less than when choosing a single share.
Disclaimer:
No investment advice. No call to buy or sell securities.