3 Facts About Today’s Hottest Investments: Thematic ETFs

In today’s Trackstar top five we feature the five all-cap ETFs investors are searching for most because, for all intents and purposes, they’re all thematic ETFs. 

For a refresher on the subject, see this aptly-titled Juice, What Is A Thematic ETF? 

Consider the five names atop Trackstar today. 

They all have two things in common: All but one is up nicely over the last year, but not a single one has beat the S&P 500 over the last year. With one exception — which we’ll get to — the S&P 500’s dominance becomes even more evident when you stretch the performance time frame to five years. 

#1 There’s Large And Growing Demand For Thematic ETFs

51.6% of professional money managers interviewed by Trackinsight say they anticipate increasing their thematic ETF exposure by 5% to 20% over the next 2 to 3 years. 

As we noted in a broader ETF installment last week, this trend reflects a desire for customization and control by financial advisors and demand from their clients, however —

When you delve into active ETFs, it’s almost as if you’re stock picking. You’re essentially ETF picking without the organized guidance of the underlying index. You’re not just buying a market cap-weighted or equally-weighted basket of the 500 stocks that make up the S&P 500. Instead, you’re making a bet that a fund manager can game an index or pure stock pick around a theme and beat the market. To some extent, you gotta get lucky.

Just because thematic ETFs — which are one type of active ETF — are becoming more popular doesn’t mean you should dive right in. But if you do, you should understand the nuances. 

#2 Thematic ETFs Come In Different Flavors

Thematic ETFs are active in that they have fund managers picking stocks around a theme. They’re not passively buying the stocks that make up a broad index. 

For example, the ARK Innovation ETF (ARKK), #1 in Trackstar today. Manager Cathie Wood selects stocks around the super broad theme of “disruptive innovation.” You’re putting a lot of faith in one person to pick stocks that, according to the fund, introduce a “technologically enabled new product or service that potentially changes the way the world works.”

Over the last year, ARKK is up roughly 26%. The S&P 500, as measured by the S&P 500 Index Fund (SPY), is up about 28%. Over five years, SPY beats ARKK, 81% to 3%. Quite a difference. Why? See fact #3. 

The #5 name in Trackstar today — the ARK Autonomous Tech & Robotics ETF (ARKQ) — gets only slightly more specific about its theme, “focused on and are expected to substantially benefit from the development of new products or services, technological improvements, and advancements in scientific research related to, among other things, energy, automation and manufacturing, materials, artificial intelligence, and transportation.” 

Like ARKK, it’s all over the map sector-wise. ARKQ’s results, as compared to SPY, are about the same as ARKK.

The #2 name in Trackstar today — the Pacer US Cash Cows 100 ETF (COWZ) — represents a different type of active ETF that The Juice thinks you can basically call thematic. This ETF takes the Russell 1000 Index and screens it for the top 100 companies based on free cash flow yield. So, it’s active in that it uses its own criteria to select stocks — albeit from an index — around an albeit quantitative theme. 

And COWZ has been the best long-term performer of the bunch in today’s Trackstar list. Over the last year it has returned about 12% compared to SPY’s 28%, however, over five years, the two ETFs are neck and neck at roughly 81%. 

So we have to tip our cap to COWZ. 

#3 Thematic ETFs Capture A Slice In Time

That said, you still had to get lucky and pick COWZ out of the vast universe of active ETFs. Just as you have to get somewhat lucky to pick winning stocks. COWZ’s performance should not be an endorsement for investing in active ETFs. 

Plus, thematic ETFs tend to capture a slice in time. Especially the ones that use broad themes such as ARKK and ARKQ. The areas these funds invest in might be hot today, but they could be gone tomorrow. We track the different sectors thematic ETFs focus on. In future Juices we’ll discuss them with a focus on their long-term volatility. In many ways, you’re dealing with flavors of the day. 

The Bottom Line: While we’re not saying that active/thematic ETFs don’t have a place in your portfolio ever, we are saying be careful if you’re a long-term investor. With COWZ as an exception, it’s tough to match, let alone beat SPY’s returns over time. And that’s because SPY holds stocks that make up a broad swath of the U.S. economy. An economy that’s diversified and keeps on ticking, unlike specific sectors within that economy that have their ups and downs. 

If you go in the thematic direction, do it with a sober mind and sound rationale. Not in response to the hype.

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