Victor Cianni, FRM’s Post

The financial equivalent of Ulysses’ sirens. They have enchanting names but can sink your portfolio. Smart cities, moonshot innovators, genomic revolution, artificial intelligence, circular economy…each of them hold the promise of a wonderful future…. but the near certainty down the road is almost always investor losses. Don’t get me wrong, identifying emerging trends and monetizing them is the essence of investing. What I am questioning is how the financial industry turns themes into subpar products. I might be okay with them being expensive, poorly constructed, and annoyingly distracting if those were their only flaws. But there the performance is just not there. In fact, our study, conducted over a 15-year period on more than 400 thematic equity ETFs across 80+ providers, shows that they consistently underperform. Less than 16% of the thematic ETFs in the universe we considered performed better than the S&P 500 over that period. And 84% did not, with a significant margin (-9.6% annual underperformance). The reasons for this massive underperformance are manifold: high fees, poor investment processes, lack of diversification and fundamental research, and launches when valuations are high… Seeing this ratio and the consistency of these results over the years, it almost feels like an invitation to bet against them. Investors, take heed. Succumbing to the temptation of thematic ETFs’ sirens is at your own peril. #thematicinvesting #informedinvestor #investment