Thematic ETFs are extremely dangerous – business

It was a breathtaking high-altitude flight that the ETF Global Clean Energy from supplier iShares began to perform in early 2020. It went from 6.21 euros to 16.21 euros in one year, or a increase of over 160%. The success of the ETF has attracted a lot of investor attention, it has been one of the best-selling funds over the past year.

ETFs are exchange traded index funds that track a specific stock market index one to one. The best known is now the MSCI World Index, which includes 1,600 securities from around the world. With it, investors invest heavily, so to speak, in the entire world economy.

But there are not only stock market indices that map the entire global economy, but also smaller, specialized indices – for individual countries, regions, industries or new trends. One of them is iShares Global Clean Energy. It focuses on the “clean energy” theme, which is why it is also called “ETF theme”. Trending topics are numerous: blockchain technology, cloud computing, esport, health, robotics or cybersecurity. Providers are responding to these trends and are increasingly offering such ETFs. Other examples are the Cyber ​​Security ETF from L&G, the New Energy from Lyxor or the Video Gaming and eSports from Van Eck. And because thematic ETFs were very successful in 2020 and delivered 30% returns on the upside, they are attracting more and more investors.

In three years, assets under management have more than quadrupled

The extraETF Investor Portal has calculated that one in three new ETF editions are now subject-related. Assets under management for these products stood at 22.6 billion euros at the end of 2020, according to figures from fund rating firm Morningstar, an increase of almost 450% in three years. New net investment more than quadrupled during this period.

Scientists and financial experts view this boom with skepticism. They urgently warn about the risks of such investments because – unlike the MSCI World index for example – they are not widely diversified, but are often very concentrated. The chances of winning are particularly great, but so are the risks of loss. Investors misunderstand the growth potential and the costs are high as well. Most importantly, experts warn of the risk that investors often arrive too late if they want to bet on supposedly forward-looking trends. The boom is often over before investors know it.

A study on the American market recently looked at this phenomenon in particular. An international team of researchers from Ohio State University, the Swiss Finance Institute, and the University of Pennsylvania have compared 1,080 stock ETFs over the years, nearly half of which have been linked to a topic. The researchers concluded that it was not investors but mainly the financial sector that benefited from thematic ETFs. To attract clients, she specifically knitted those ETFs around hot stocks that were in the public eye due to high price gains. By the time ETFs entered the market, interest in topics had generally already peaked. When prices fell again, many investors sold at a loss after just a few months.

The study also shows that a growing number of inexperienced and ill-informed investors are investing in thematic ETFs. Some of them have “irrational expectations” and assume past price gains for the future, according to the document. Munich-based fund analyst Gerd Kommer made the same observation: “These investors are mostly men, willing to take risks and motivated by testosterone. They want to compete with others and get rich as quickly as possible. The financial industry does business with these characteristics. By flooding the market with new products as soon as a trend emerges, it appeals to “some of man’s ugliest qualities: greed and envy.”

“This contradicts the original idea behind ETFs”

Kommer’s biggest criticism of thematic ETFs is that they “contradict the original idea behind exchange-traded index funds, namely to invest at low risk and broadly diversified across many sectors and countries”. While MSCI Word has 1,600 stocks, most thematic ETFs only have 30 to 100 companies. The strongest individual positions in thematic ETFs often have above-average proportions. For example, in iShares’ STOXX Europe 600 Retail UCITS ETF, the share of the top ten companies is 99.6%. The three industry giants Kering, Zalando and Inditex alone account for around 57 percent. The consequences of this high concentration are often greater risk for the investor and higher volatility. For the iShares Global Clean Energy ETF, this has been almost twice as high as for the global stock market since 2007.

Kommer also finds it disturbing that investors often have completely wrong expectations about the performance of individual companies. Especially in forward-looking industries, the potential growth of companies is usually already included in the price when ETFs hit the market. High valuations have often been followed by below average returns. The US study also comes to this conclusion. Thematic ETFs have often collapsed, especially in the first five years.

And finally there are costs, which are one of the decisive factors for success on the stock market. According to an extraETF study, with thematic ETFs, investors often have annual costs twice as high as with standard indices. The “Emerging Markets Internet & E-Commerce” of the supplier HANetf tops the list of the most expensive thematic ETFs with 0.86%. Anyone who has invested 10,000 euros pays 86 euros per year. For large indices, on the other hand, the fees are between 0.1 and 0.3%.

Investors should make the best use of fictitious money

Despite all these drawbacks, fund analyst Gerd Kommer is confident that thematic ETFs will continue to gain in importance. Both the constantly growing supply and the strong demand bear witness to this. On the other hand, Kommer believes that the market will regulate over time: “The sales figures will decrease as investors burn their fingers. Critical studies would also have a braking effect.

Kommer advises investors not to be blinded by the fairytale profits of yesteryear: “The success that many people expect from ETFs will not be achieved altogether. He recommends that investors bet play money on it if necessary. “Otherwise there could be huge losses, you have to be aware of that. “

By the way, if you keep telling the story of iShares’ former Global Clean Energy prodigy, Kommer’s warning will come true. The value of the ETF is now only 10.69 euros. It has lost nearly a third of its value since early January. Thematic ETFs are also good for diving like this.

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