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Thematic ETFs launch at the top
The launch cycle
The sequence repeats. Something becomes hot, whether AI, cannabis, electric vehicles, or sustainable energy, and asset prices in that theme rise because everybody wants in. An index provider creates an index for the hot thing, and then an ETF gets launched, when prices are already up here.
Prices then come down, and the returns on thematic funds tend to be very poor.
Tech and new products
Technology is a bigger basket, but it is still one sector. It has performed incredibly well, and having a big concentration in it today is a lot less obvious. Products have also appeared that promise access to private AI companies and SpaceX. They charge high fees, and it is not obvious they bought the underlying securities at good prices. Financial firms are very good at seeing what investors want, even when it is not good for them, and creating a product to fulfill that desire.
How did the dot-com era show this pattern?
In 1998 and 1999, fund companies launched large numbers of technology and internet funds as dot-com stocks soared. The Nasdaq Composite peaked on March 10, 2000, and by October 2002 had fallen about 78 percent. The index did not close above its 2000 peak until April 2015.
Why do index providers keep making theme indexes?
Index providers such as MSCI, S&P Dow Jones Indices, and FTSE Russell build indexes by rules, and ETF sponsors pay them licensing fees to track the indexes. A new theme gives a provider a new product to license and a sponsor a new fund to sell. The fees usually scale with the assets in the fund.
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