Don’t Get Burned By This Hot Investing Trend

Over the last few months, The Juice has spent a fair bit of all of our precious time discussing ETFs. We explain why in this recent installment where we define and detail equal-weight ETFs:

Because they’re a great way to invest in the stock market, but also because we use them as a tool to help demystify investing. We learn a lot about how investing works by viewing the space through ETFs. 

ETFs make investing (relatively) easy.

Until they don’t. Until they make it freaking complicated as hell. 

Sometimes this complication isn’t that big of a deal. While it helps to know the difference between the SPDR S&P 500 ETF (SPY) and Vanguard S&P 500 ETF (VOO), if you pick one over the other it’s not the end of the world. 

However, it’s an entirely different story to not know the difference between standard broad market-tracking ETFs and aforementioned equal-weight ETFs or fancy approach ETFs with absurdly high expense ratios and super straightforward ETFs that outperform minus the complication. 

Just because ETFs can seem boring relative to meme and penny stocks doesn’t mean they can’t be just as dangerous. If not more.

Hear us out. 

We like to think that when you take a chance on a meme stock or want to feel like a baller by owning 20,000 shares of a penny stock, you’re doing so with a relatively small amount of capital. You keep this type of investing in the speculative section of your portfolio. 

However, if you’re not a trader, you might view ETFs as long-term investments. Particularly the hot new thing — thematic ETFs. (We define what they are right here). You might be putting a fair bit of your long-term capital in these investments. Maybe as part of a retirement account. 

And this doesn’t make you an idiot. 

You want to be a forward-looking investor. So when you see a fund dedicated to owning stocks in these innovative, futuristic spaces, you’re like, I’m ahead of the curve. I’m buying the next what or whoever. 

Heck, in November, these spaces received the most inflows in the thematic ETF universe:

• Cryptocurrency: +$1.33B
• Net Zero 2050: +$1.01B
• Artificial Intelligence & Big Data: +$284M
• Nuclear Energy: +$266M
• China Digitalization: +$171M

And these ones were the top performers: 

• Next Generation Internet: +26.68%
• FinTech: +24.24%
• Disruptive Technology: +23.32%
• Digital Infrastructure & Connectivity: +22.72%
• BioTech & Genomics: +19.74%

We’re not here to say you should or shouldn’t invest in any of these spaces via individual stocks or ETFs. That’s not what this is about. We are here to say — be careful!

Because …

• According to Morningstar, via the Financial Times, “Thematic funds that existed for the entire five-year period ending June 30 enjoyed annualised returns of 7.3 per cent, but the typical investor received only 2.4 per cent a year as many bought in after the bulk of returns had been made.”

This is because many investors in thematic ETFs have a tendency to buy the top. They buy high and sell low. 

Not all that different from the way a meme or penny stock acts. 

We see all the hype. We get all fired up. We jump in after the money has been made. 

Astute traders can game thematic ETFs — legally — just as they do meme and penny stocks (also, legally, assuming they’re not actually pumping and dumping them). 

One look at the most searched all market capitalization equity ETF in Trackstar, our proprietary sentiment indicator, tells the story. 

Sure, the ARK Innovation ETF (ARKK) is up about 40% over the last year, but it’s so volatile. So many highs, so many lows, so many swings. And you’re in this thing with a different mindset than, say, Apple (AAPL), Tesla (TSLA) or Microsoft (MSFT), companies you know something about. In other words, it’s relatively easy (and sensible) to stay the course on household names and much easier to get shaken out of an ETF you might have no business being in in the first place. 

The Bottom Line: The Juice loves ETFs. We just don’t like to see well-intentioned investors get lured into precarious, if not downright bad or unnecessary investments. 

So, we’ll keep talking about ETFs and relate them to long-term investing. In fact, once the calendar turns to 2024, expect us to throw an updated model ETF portfolio your way. It’ll reflect the way to use ETFs to invest precious money (and time) for something big, such as retirement.

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