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Thematic ETFs have a long way to go to silence skeptics

In addition, key disciplines such as robotics, cyber security and clean energy include more growth-oriented firms that are trading at inflated prices until recently.

ETF Stream cited work by David Blitz, Head of Quantitative Research, which found that 36 MSCI thematic indices had a downside price risk of -0.41 and a profitability risk of -0.57 over the past three years through the end of April 2021 .

“From an asset-pricing perspective, this means that investors in passive thematic indices could potentially face lower long-term expected returns,” Blitz said.

As a result, the importance of timing cannot be underestimated. While that hasn’t been the ETF issuers’ strong point, many launches are taking place at the height of the excitement of a megatrend — right at the time when the risks of trend-chasing are most prevalent — in order to attract maximum attention.

According to the analysis, in the five years after they hit the market, 526 specific — thematic and sector — ETFs delivered an average risk-adjusted underperformance of -3.1% per year.

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