Thematic ETFs unlikely to repeat early gains
Exchange traded funds (ETFs) built around thematics may be unable to repeat the success of the theme as the information is now priced in, according to Stockspot.
Marc Jocum, investment and operations at Stockspot, said thematic ETFs tended to be based on areas which had already enjoyed early success. This meant, they may be unlikely to repeat those strong gains.
“Most new ETFs centre around themes that have enjoyed strong recent returns,” he said.
“New ETF marketing brochures show strong past performance (which usually do not incorporate fees). ETF issuers know that showing strong past returns leads to strong inflows after an ETF lists.
“These strong returns rarely continue because the market information that led to those strong returns is already priced into the companies within the ETF. In other words, these themes have largely played out by the time an ETF launches and thematic ETFs usually launch when retail interest is already near its peak.”
Last week, BetaShares launched its Crypto Innovators ETF which broke records by trading almost $40 million on its first day listed on the Australian Securities Exchange (ASX).
Academic research found thematic ETFs in the US which were launched between 1993 and 2019 tended to underperform the broader market by 4% per year for at least five years after launch.
As a result, they were more likely to close after a prolonged period of underperformance versus the market or because of minimal market take-up which left investors facing potentially being forced sellers of their holdings.
Jocum gave the example of BetaShares Commodities Basket ETF (QCB) which closed in December 2020 but where the baskets of commodities it held had since risen 35%.
“If you are going to venture into thematic ETF investing, be cautious of the ‘herding’ bias and ‘return chasing’ which is what makes the latest thematic ETF launch alluring but also a risky bet,” Jocum said.
The sentiment was echoed by a panel on Money Management’s ETF webinar, which questioned how sustainable the buying interest of thematic ETFs would be.
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Laura Dew
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