I get asked a lot about “what do you think of this company/investment/trend?”
Many investors don’t know they are asking about thematic funds.
Before you learn about thematic funds, we need a bit of a history lesson from another, much more relatable industry – the diet industry!
Do you remember the Grapefruit 45 diet? Me either. It’s dead.
It’s another of those fad diets in a long list of fad diets that made the creators a lot of money, then died.
How about Atkins? Almost dead.
Keto? I’ve done Keto. It will be dead/gone/kaput in ten years to be replaced by something else.
Mark my words – even if you’re on this diet right this second, you’ll be doing something else.
Always happens, always will…just like fad investments.
There’s a big difference though – fad diets will trim your waistline temporarily.
Fad investments can blow up your financial plan permanently (and not in a good way!)
And the worse thing is…the most common way to recover is working more or working longer.
Some of these funds try to profit from the latest buzzwords, technology, and economic trends.
Thematic Fund Examples
Have you heard of anything about…
- Pot stocks
- AI investing
- Food funds (nutrition and agriculture)
- Green energy
- Electric vehicle funds
Do you remember Motif Investing? It was a digital broker mentioned on the Scott Alan Turner show back in 2017. They were selling these types of funds.
What’s funny to me after being in this industry for so long, is the names change, but marketing and sales don’t.
Something hot trend comes along. And companies cobble together funds for the stuff where they know people will be glad to try to make money.
The Problem With Thematic Funds
Unfortunately for uneducated investors or people chasing returns, the outcome doesn’t meet the hype. The problems can be many:
- Over concentration. I’ve seen funds where the 10 biggest companies in the fund (the top 10 holdings) make up more than 50% of the fund. Think of it like having 4 foods make up 80% of your diet (not a good balance).
- Expensive: Think of it this way…it’s expensive. The average annual fee for thematic funds is 0.62%, according to ETF.com. That’s nearly 10x more expensive than many passive index funds.
- Sucky performance: Over the past decade and a half, nearly half of all available thematic funds have shut down. Well, if they were any good and making investors money they wouldn’t close down, right? Think of it this way…they suck.
I understand you might be experiencing FOMO – fear of missing out. It’s hard to resist hot trends.
Math doesn’t lie. Even though people use half math, fake math, and mute math to sell you something you’d probably be better off without.
An Alternative For Smart Investors
Diversification and patience – not trends – can be the keys to successful investing.
You put yourself in one of the best positions to benefit from any and all trends by investing lots of stuff. Or to put it in Wall Street jargon – a broadly diversified portfolio.
You’ll already own the trends and get the rewards from the inventors and innovators that haven’t even made the news yet.
Technology changes from day to day; your investment philosophy shouldn’t.
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