In our recent post about thematic ETFs, we discussed the growth of so-called “thematic ETFs”. These are ETFs that follow a theme. One of our favorite writers at the WSJ is Jason Zweig, and he also wrote about these ETFs recently. Today, they represent some of the market’s hottest funds by using concentrated exposure.
“Often called thematic ETFs, these funds cut across industries, trying to capitalize on ideas like alternative energy, cloud computing or 3-D printing. Others buy stocks that could benefit as more people work from home, demand gender or racial diversity, or lavish money on their pets.”
Jason Zweig, The Intelligent Investor, Wall Street Journal, January 15, 2021
More Concentrated Exposure
By concentrating on a particular theme, like solar power, robotics or industrial innovation, many of these funds can have very high returns. For example, the Invesco Solar ETF (ticker: TAN) had a 234% return in 2020. Similarly, the ARK Innovation ETF (ticker: ARKK) returned 153%. Of course, these returns didn’t come without their own risks. The volatility of these two thematic ETFs were 55% and 49%, respectively. As a basis of comparison, our typical benchmark for stocks is the iShares Core S&P 500 ETF (ticker: IVV) and bonds is the iShares Core Total US Bond ETF (ticker: AGG). The 2020 return of these ETFs appears below at 18.4% and 7.5%, respectively. Also, note their lower volatility than the thematic ETFs mentioned here.
Higher expenses in thematic ETFs
Expense ratios are often much higher in thematic ETFs than broad-market ETFs like those that track the S&P 500. For instance, the three thematic ETFs from above have expense ratios of 0.69%, 0.95% and 0.75% according to ETF.com. In contrast, our stock and bond benchmark ETFs (tickers IVV and AGG) have expense ratios of 0.04% and 0.06%. So, investors must pay a premium to get unique exposure to these themes. And, until a thematic ETF grows sufficiently, the bid-ask spread on them could be much larger, further degrading returns when they are bought and sold frequently. Nevertheless, we found in 2020 that thematic ETFs, when built into a diversified portfolio, can both manage risk and boost returns.
You must be logged in to post a comment.