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In this video, we cover the worst types of ETFs everyone should avoid. With the rise of AI there's been more and more talk about investing in that area to take advantage of the potential positive future. A good way to get involved is by investing in something like an AI ETF. On the surface this seems like a great way to make some money, but what's easily missed is understanding the downsides of theme based funds like an AI ETF. Luckily we have a lot of history to look at when it comes to a thematic ETF since people started creating them in the 1950's.
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Theme based ETFs are a category of Exchange-Traded Funds (ETFs) that are designed to offer exposure to particular trends, sectors, or themes. These themes can be wide-ranging and may include things like artificial intelligence, clean energy, e-commerce, biotechnology, cybersecurity, and even specific demographic trends.
Thematic ETFs are often constructed by picking stocks or other assets that are believed to be best positioned to take advantage of these trends. For example, a thematic ETF focusing on artificial intelligence might include stocks from companies that produce AI chips, develop AI software, or heavily use AI in their business operations.
The benefit of this approach is that it allows investors to gain exposure to specific trends or sectors without having to research and buy individual stocks. This can be especially useful for individual investors who may lack the resources or expertise to effectively research individual companies.
However, thematic ETFs also come with their own set of risks. They can be more volatile than broader market ETFs, as they are typically less diversified and more exposed to the ups and downs of a specific sector. The success of a thematic ETF is heavily dependent on the accuracy of the predictions about the future of the trend or sector it's based on.
Since these types of investment funds have been around since the 1950's we can get a good idea of how they've performed over time. Unfortunately, there are more downsides than upsides when investing in a theme based ETF. Morningstar found that over a 15 year period, 78% of all thematic funds were liquidated or merged, because either they performed terribly, or they couldn’t get enough people to invest in them, another 12% survived but lagged a Global Market Index, and a little less than 10% both survived and outperformed the global stock market benchmark.
Morningstar found that after 3 years a little over 50% of thematic funds outperformed the benchmark, but over longer periods of time the odds drop significantly. Even though this is the case, it wouldn't make sense to try to beat the market over a short period of time because you have to be good at timing many different things. When do you get in that ETF to outperform? How do you know when to sell at the right time so that you will end up outperforming? To actually make decent money trading these in the short term, you'd have to get all 3 of those questions 100% correct. There's too many variable to make the risk worth it.
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Disclaimer: This video is for entertainment purposes only. Everyone's situation is different so do your own research before making any decisions with your money.
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