Exchange-traded funds (ETFs) are a low-cost way to invest with instant diversification, but with more of these investment vehicles being launched with ties to trendy themes, investors can more easily fall into a trap of chasing high recent returns.
Chris Brycki, founder of Stockspot, an online investment adviser and fund manager, says inflows of money from investors, particularly into themed ETFs, tend to be tied to recent performance. However, past performance does not mean the winning run would continue.
More exchange-traded funds are being launched with trendy investment themes.Credit:Istock
“What can happen is that an ETF is launched when the theme is producing strong returns and there is a lot of interest from retail investors,” Brycki says.
Investors attracted to themed ETFs with strong returns can be in for a shock when future returns are not nearly as good. Themed ETFs can also be particularly volatile, he says.
There are about 250 ETFs listed on the Australian Securities Exchange (ASX). They track the performance of almost everything – from Australian and overseas sharemarket benchmarks, to gold, palladium and other precious metals, and commodities. More are listed all the time.
ETF providers have launched ETFs with themes, such as climate change, cloud computing, clean energy, electric vehicles, fintech, semiconductors and even blockchain.
A flood of money from investors has seen the market capitalisation of the ETF sector soar to more than $130 billion, up from $46 billion just three years ago.
The Vanguard Australian Share Index ETF was launched in 2009 and now has about $10 billion in funds under management, making it the largest ETF listed on the ASX.
It tracks the performance of the S&P/ASX 300 Index, which comprises the 300 largest companies on the exchange. Next largest is the iShares S&P 500 ETF, which tracks the US benchmark sharemarket index, and has more than $5 billion in funds under management.
