Most of the ETFs investing in the types of themes highlighted in this article haven’t been around long enough to generate the three-year track record many advisors require (or at least desire) before they add them to client portfolios. The ROBO fund is one of the graybeards with a five-year track record.
But the newness of many thematic ETFs doesn’t bother Lavine, who considers them forward-looking products.
“When you look at strategies or investment vehicles that have an objective rules-based approach, it’s more about what are you buying today than what you could’ve bought in the past,” he says. “I think the traditional framework of using performance-based metrics, which was more suitable for the mutual funds or the institutional separate-account space, doesn’t necessarily apply when looking at ETFs because you have more transparency in what you’re buying and what you can expect going forward.”
Perhaps, but some advisors seemingly want nothing to do with thematic ETFs. “The benefit of ETFs is supposed to be similar to that of index funds—a passive, low-cost vehicle that will not underperform due to costs or bad investment selection. Not sure how these thematic funds fulfill the needs that ETFs were meant to serve,” says David Haraway, a certified financial planner and principal at Substantial Financial in Colorado Springs, Colo.
Nonetheless, thematic ETFs make sense to a lot of advisors—and investors in general—who believe they can add growth as satellite positions in a well-diversified portfolio. But it’s important to not get mesmerized by the hype that often surrounds these products and the themes they represent.
“The big takeaway is these things aren’t to be invested in on a whim or with emotion,” says Jay Batcha from Optimal Capital. “Look for sustainable trends. Get under the hood and make sure there’s a repeatable and defensible process behind the portfolio selection. We don’t trade them because we’re looking to hit these dynamic, innovative growth trends, and ETFs give us access without needing to be experts in individual names, which for some of these fields is hard to do.”