`Investing on steroids' pays off as thematic ETFs outperform

Funds focused on solar power, marijuana and clean energy have gotten off to a strong start this year

Feb 28, 2019 @ 1:45 pm

By Bloomberg News

For returns more than triple the stock market average so far this year, look no further than a quirky group of exchange-traded funds that bet on the latest investment fads.

The top three performing U.S.-listed, non-leveraged ETFs this year are so-called thematic funds — niche products that focus on categories. From marijuana to solar power and clean energy, portfolios constructed with companies betting on industrial and social transformations are trouncing rivals across the broader equity market.

While it's only the end of February, their performance has been astounding. The ETFMG Alternative Harvest ETF (MJ), which wagers on the growth of cannabis, has surged nearly 50%. A fund that focuses on solar power, the Invesco Solar ETF ( TAN) and the Invesco Wilderhill Clean Energy ETF (PBW), which holds companies across the new-energy spectrum, have both gained more than 30%.

"This is really investing on steroids," said Todd Rosenbluth, director of ETF research at CFRA. "You're taking significant risk — sometimes that gets rewarded, but you're going to fail quite often with these investment strategies."

(More: Life is brutish and short for new ETFs)

Most recently, investors have been compensated for the risk. While the S&P 500 is experiencing its best start to a year since 1987, these funds have tripled year-to-date returns. But that comes after a volatile 2018, when all three funds fell more than double the benchmark index. In fact, TAN saw losses four times greater than the S&P 500's 6.2% decline.

While performance has wowed, investor flows haven't necessarily followed suit. So far this year, investors have pulled cash from TAN and PBW. The weed-focused fund has taken in $227 million, sending its total assets above $1 billion.

In the more than $3.5 trillion ETF industry, thematic ETFs have grown increasingly popular as issuers look for ways to differentiate themselves, while charging more money.

(More: 9 ways investors are using ETFs)

Last year marked a record for thematic ETF launches. State Street Corp. set out with the first-ever fund tracking space and deep sea exploration. Other niche products look to pets, self-driving cars and the growth of artificial intelligence. Thematic ETFs on average cost investors $5.80 for every $1,000 invested, compared with $5.00 for all ETFs.

With higher costs and elevated risk, ETFs such as these aren't for everyone. At Kingsview Asset Management, the team tends to stay away from thematic ETFs since they're more a "flavor of the day," according to Paul Nolte, a Chicago-based portfolio manager at the firm.

"If you hit them right, they're wonderful — they're up huge amounts already this year," Mr. Nolte said. "But if you hit them wrong, or you think this theme is going to work out and it doesn't, you end up with a big dud."

(More: Social Finance plans no-fee ETFs)

0
Comments

What do you think?

View comments

Most watched

INTV

Young professionals see lots of opportunity to reinvent the advice experience

Members of the 2019 InvestmentNews class of 40 Under 40 have strategies to overcome the challenges of being young in a mature industry.

INTV

Young advisers envision a radically different business in five years

Fintech and sustainable investing are two factors being watched closely by some of the 2019 class of InvestmentNews' 40 Under 40.

Latest news & opinion

New Jersey fiduciary rule: Pressure leads to public hearing, comment deadline extension

Industry push results in chance to air grievances on July 17 and another month to present objections.

InvestmentNews' 2019 class of 40 Under 40

Our 40 Under 40 project, now in its sixth year, highlights young talent in the financial advice industry. These individuals illustrate the tremendous potential of those coming up in the profession. These stories will surprise, entertain, educate and inspire.

Galvin to propose fiduciary rule for Massachusetts brokers

The secretary of the commonwealth is proposing a fiduciary standard in response to an SEC investment-advice rule he views as too weak.

Summer reading recommendations from financial advisers

Here are some books that will keep you informed and entertained during summer's downtime

4 strategies for Roth conversions

There's never been a better time to do a Roth conversion, and here are several ways to go about it.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print