It has become quite fashonable, worldwide, for new ETF’s to be launched onto the market with a “theme”. Robotics, Alternative Energy, Cryptocurrency, Battery Tech, or Artificial Intelligence are just some examples of themes where an ETF provider will bundle a number of companies together with a catchy ticker.
This trend seems to be also happening in Australia. Investsmart has been following the performance of a few of the new Australian thematic ETFs e.g. HACK (Cybersecurity), ERTH (Climate Change Innovators), ACDC (Battery Technologies and Lithium), ESPO (Gaming and eSports), CRYP (Cryptocurrency), CLDD (Cloud Computing) and DRUG (Healthcare). Their results, since the ETF inception dates, are a mixed bag. ACDC, DRUG and HACK outperformed the ASX200, while ERTH, ESPO, CRYP and CLDD have underperformed.
The two main problems with themed ETF’s is that they are generally expensive – have high management costs relative to other broad index ETF’s and, they concentrate risk in just one part of the market – the theme might suddenly fall out of favour e.g. ARKK.
In a comprehensive study (over 25 years) of US ETF’s, The Ohio State News concludes that these new themed ETF’s are based mostly on “hype” and they tend to lose value in comparison to the general market very soon after they are launched.
… specialized ETFs lost about 6% of value per year, with underperformance persisting at least five years after launch.
The Ohio State News
Thematic ETFs are often launched near the top of the market when interest in that theme is at a high. As a result, the stocks in the thematic ETF can start overpriced, resulting in underperformance.
Investsmart
In the U.S. of the 277 ETFs that shut down in 2020, one-quarter of them didn’t make it to their third birthday
Stockspot – Why we avoid new thematic ETFs
Slack Investor Themed ETF Record – Not Good
Slack Investor has also not been immune to the “hype” and has bought a number of themed ETF’s, as well as a few broad-based index-type ETF’s. The latter, of which, I am generally happy with their long-term performance. My thinking was to get onboard, in a relatively easy way, to some exotic investment themes.
In the past 5 years I have bought VanEck Morningstar Wide Moat ETF (MOAT), Vanguard FTSE Emerging Markets Shrs ETF (VGE), BetaShares Global Cybersecurity ETF (HACK), BetaShares Glb Rbtc & Artfcl Intlgc ETF (RBTZ), BetaShares Asia Technology Tigers ETF (ASIA), VanEck Video Gaming & eSprts ETF (ESPO), BetaShares Global Quality Leaders ETF (QLTY), Global X Battery Tech & Lithium ETF (ACDC), and Vanguard FTSE Emerging Markets Shrs ETF (VGE).
With hindsight, I can see the trap that I have fallen into. For example, E-Sports. I had read about E-Sports in the press and didn’t know much about them – except that they were popular, and they were the new “thing” – and growing fast. I didn’t know any individual companies in the field, as most of them were based in the US. When VanEck Bundled together a few of the E-Sport companies into a themed ETF, VanEck Video Gaming & eSprts ETF (ESPO) I was excited and bought into it. The trouble was, I was late to the party. As the chart above shows, by the time I entered the market, there was already a lot of hype, and the entry price paid was probably over-inflated.
When I plot out the price history of the themed ETF’s that I have bought over the past few years, the theme was not a dream. With the exception of the MOAT ETF, the flat or downward lines indicate a less than lustrous performance. Ideally, all my BUYS would slope upwards from left to right over time.
This chart is a good look in the “house of mirrors” for Slack Investor, I will continue to buy themed ETF’s in a small way to expose my investments to interesting sectors. However, I will modify my purchases of these themed ETF’s in the future – Or at least, wait a few years after launch for the excitement to settle down … and then invest.
Not all is lost, there are some bright lights amongst the themed ETF’s. The Morningstar Australian ETF’s top ten performers over 5 years ar a mixture of both themed ETF’s, and broad-based ETF’s. Over a realistic 5-yr time frame, where there is enough time for “our flowers to grow”, the top 10 annualized average 5-yearly growth is shown in bold. Over 10% p.a. is impressive – but you have to be lucky – or a great ETF picker.
| Name | Yield % | Fees (MER%) | 1-yr p.a. | 3 -yr p.a. | 5-yr p.a. | 10-yr p.a. |
|---|---|---|---|---|---|---|
| BetaShares Global Sstnbty Ldrs ETF (ETHI) | 2.61 | 0.59% | -15.41% | 11.35% | 15.13% | — |
| BetaShares NASDAQ 100 ETF (NDQ) | 3.37 | 0.48% | -28.41% | 9.25% | 14.71% | — |
| BetaShares Global Cybersecurity ETF (HACK) | 8.72 | 0.67% | -22.06% | 10.68% | 14.32% | — |
| Global X Physical Palladium (ETPMPD) | — | 0.49% | -2.05% | -1.16% | 14.17% | 14.43% |
| BetaShares Australian Res Sect ETF (QRE) | 14.54 | 0.34% | 22.98% | 13.80% | 13.72% | 7.71% |
| VanEck Morningstar Wide Moat ETF (MOAT) | — | 0.49% | -7.38% | 8.17% | 13.37% | — |
| SPDR® S&P/ASX 200 Resources ETF (OZR) | 15.64 | 0.34% | 22.90% | 12.96% | 13.23% | 7.49% |
| iShares Global Healthcare ETF (AU) (IXJ) | 1.1 | 0.40% | 1.90% | 9.79% | 13.11% | 16.93% |
| iShares S&P 500 ETF (IVV) | 1.42 | 0.04% | -9.03% | 10.09% | 13.03% | 17.94% |
| Global X Morningstar Global Tech ETF (TECH) | 4.99 | 0.45% | -29.06% | 5.29% | 12.76% | — |