Review:  Are thematic ETFs gimmicks or smart strategic plays?

Investment companies are incredibly creative, especially when it comes to new ways to make money. There’s always some new investment trend, and investment companies are more than happy to oblige.

They don’t really care if something is a particularly good idea – they just want to help you, the investor. And obviously they should be compensated for their troubles…

We’re seeing more and more funds launching that track “themes” or very narrow niches. What’s interesting this time around is that most of these types of funds are index funds or ETFs.

I’d love to believe that this is because the financial services industry has gotten religion and realized that passive investing is the way to go, but I doubt that’s the case. It’s more likely because index funds are a lot easier to manage – once you design the index you don’t really need to think about it anymore.

People get excited about new trends and industries all the time, and they want to take part in them. But that doesn’t mean they belong in your portfolio. If you think an industry is hot, a lot of other people probably think the same thing, and that information has already been incorporated into stock prices. What matters is what happens next and how that compares to what the market expects.

With investing, boring is better. We know what works. Disciplined, long-term investing focused on the factor premiums that have positive expected returns. Industry – even companies that make drones or 3D printers – is not one of those factor premiums.

We talk more about the factor premiums you should focus on in our ebook, A Minimalist's Guide to Understanding Financial Markets

 

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