Writing now for Business Insider: Finanzfluss editor-in-chief Markus Schmidt-Ott and co-founder Thomas Kehl. Financial flow / collage: Dominik Schmitt
Thematic ETFs, like the Global Clean Energy ETF, can offer high returns but can also cause losses, according to Finanzfluss editor-in-chief Markus Schmidt-Ott and co-founder Thomas Kehl in their article for Business Insider.
According to a US study, new thematic ETFs lose 30 percent of their risk-adjusted returns in the first five years.
A new ETF often comes at the height of hype, which is the worst possible time to invest.
In 2021 there was a hype about the Global Clean Energy ETF von iShares. With clean energy, investors have been able to achieve more than 200 percent returns in less than a year. This attracted many investors to focus on clean energy. This puts the fund in a very specific category of ETFs: thematic ETFs.
Why aren’t thematic ETFs worth it?
The Global Clean Energy ETF only really became known in January 2021 and it was exactly in that month that the price was at its all-time high. Since then, things have only gone downhill. This means that most people who invested in the fund back then have only seen a falling price in their portfolio since then.
This is how the iShares Global Clean Energy ETF has developed since 2019. finanzen.net
Anyone who had followed the euphoric investment tips in January 2021 would only have less than half of the invested assets left today. Bitter if you have invested large parts of your total assets in this ETF.
How expensive are thematic ETFs?
The ETF market is developing rapidly and ETF providers are trying to outdo each other with increasingly attractive offers. This reduces costs and private investors benefit. The range of ETFs is also growing. According to data from the ETF search at Finanzfluss, an average of 300 new ETFs per year have been brought onto the German market over the past seven years. There have been around around since the beginning of the year alone 40 new ETFs.
Broadly diversified ETFs reflect specific regions or even the entire world and are particularly cheap. Thematic ETFs, on the other hand, charge fees that are around twice as high. They are also significantly less diversified because they are limited to individual topics. On average, a regional ETF costs 0.2 percent of the invested assets (total expense ratio), while a thematic ETF costs 0.4 percent. Such thematic funds can be very lucrative for fund providers if they raise enough money. Accordingly, most of the newly launched ETFs reflect a specific theme, such as climate change or infrastructure.
When you would have earned more with an MSCI World ETF
Anyone who focuses on the right topic at the right time can benefit from it. And if you focus on the wrong topic or get it at the wrong time, you will make a loss. In 2021, one could perhaps already have guessed that artificial intelligence would one day be important. But the hype around the topic only began in 2023. Anyone who had invested 10,000 euros in an ETF that specializes in AI in 2021 would have assets of 12,000 euros today. With the MSCI World However, you would have made it to 14,000 euros. So AI loses in this regard. It would be different if you had focused on the topic in 2023: Then you would have turned the same amount into 14,000 euros within a year and with the MSCI World only 12,000 euros.
Jumping on a topic at the right time is one thing. But jumping off at the wrong time can also lead to losses. With cannabis ETFs, for example, it was temporarily possible to more than double one’s assets. All cannabis ETFs that can be traded in Germany have now been dissolved because investors lost interest in them and they were no longer worthwhile for the fund providers.
On average, thematic ETFs make a loss of 30 percent
One Study by four researchers from the USA systematically examined the performance of thematic ETFs and found that new ETFs lose 30 percent of their risk-adjusted returns in their first five years. Broadly diversified ETFs, on the other hand, do not lose any returns from this point on. This means that thematic ETFs are massively disappointing compared to indices such as the MSCI World. This shows that thematic ETFs are not worth it.
But things get interesting when you take a look in the rearview mirror. If you had launched the respective funds three years earlier, your returns would have increased. So you could say: Whenever new ETFs come onto the market for a certain topic, you tend to make a loss with this topic, whereas before you would have made a profit with it.
Conclusion: Why thematic ETFs are not worth it
The explanation for this is simple: an ETF provider only brings an ETF onto the market when there is high demand. This demand is greatest when the topic has reached everywhere and is making headlines. So a new ETF usually comes at the height of hype – the worst possible time.
The study thus proves what happened to many people with the Global Clean Energy ETF: With a good nose, you can benefit from trendy topics with ETFs and thus achieve high returns. The problem is that if the trend is already there, it is too late. And predicting future trends is just as dubious as reading tarot cards.
*Finanzfluss is a German YouTube and Twitch channel that positions itself as an education and information platform on the subject of finance. From now on, Finanzfluss editor-in-chief Markus Schmidt-Ott and co-founder Thomas Kehl are also sharing their knowledge here at Business Insider.
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