The Rational Reminder Podcast | RR #185 - Lighting your Money on Fire with Thematic ETFs @rationalreminder | Uploaded January 2022 | Updated October 2024, 11 hours ago.
As we all know, not all investments are equally exciting, but on today’s show, we make the case that you should not put your money into an ETF just because it is trending. A thematic ETF is a fund that offers the opportunity to invest based on a particular theme, such as climate change or artificial intelligence. The concept behind investment themes is that they ostensibly offer investors the opportunity to participate in potentially disruptive trends with the idea of earning excess returns. The problem we find with these ETFs is that as the markets they are based on attract more attention and an influx of entrants, everybody’s per-share earnings get reduced. By the time a themed ETF becomes investable, it experiences a mean reversion of prices and media sentiment, in contrast to the attractive returns shown in its backtested index. This means that while thematic ETFs are good business for the ETF providers, they do not create value for investors on average. Toward the end of our show, we invite Wes Gray from Alpha Architect to talk about their change from index to active ETFs and more. Wrapping up, Wes along with Robin Taub join us for a lively round of Talking Cents. Tune in today!
Timestamps:
0:00 Intro
6:30 Cameron's recommendations
13:58 Thematic ETFs
42:48 Discussion with Wes Gray from Alpha Architect
1:03:40 Talking Cents with Robin Taub and Wes Gray
Books From Today’s Episode:
The Wisest Investment — amzn.to/3BWQfZw
Quantitative Momentum: A Practitioner’s Guide to Building a Momentum-Based Stock Selection System — amzn.to/2XZWFoH
Quantitative Value, + Web Site: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors — amzn.to/2U6GuVh
Chatter — amzn.to/3IAtOwS
Links From Today’s Episode:
Rational Reminder on iTunes — itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582.
Rational Reminder Website — rationalreminder.ca
Shop Merch — shop.rationalreminder.ca
Join the Community — community.rationalreminder.ca
Follow us on Twitter — twitter.com/RationalRemind
Follow us on Instagram — @rationalreminder
Benjamin on Twitter — twitter.com/benjaminwfelix
Cameron on Twitter — twitter.com/CameronPassmore
Wes Gray on LinkedIn — linkedin.com/in/alphaarchitect
Robin Taub — robintaub.com
'Earnings Growth: The Two Percent Dilution' — researchaffiliates.com/documents/FAJ-2003-Two-Percent-Dilution.pdf
'The Big Market Delusion: Valuation and Investment Implications' — tandfonline.com/doi/full/10.1080/0015198X.2020.1730655
'Overconfidence and Speculative Bubbles' — https://www.journals.uchicago.edu/doi/abs/10.1086/378531
'Competition for Attention in the ETF Space' — papers.ssrn.com/sol3/papers.cfm?abstract_id=3765063
'Betting Against Quant: Examining the Factor Exposures of Thematic Indices' — papers.ssrn.com/sol3/papers.cfm?abstract_id=3899750
As we all know, not all investments are equally exciting, but on today’s show, we make the case that you should not put your money into an ETF just because it is trending. A thematic ETF is a fund that offers the opportunity to invest based on a particular theme, such as climate change or artificial intelligence. The concept behind investment themes is that they ostensibly offer investors the opportunity to participate in potentially disruptive trends with the idea of earning excess returns. The problem we find with these ETFs is that as the markets they are based on attract more attention and an influx of entrants, everybody’s per-share earnings get reduced. By the time a themed ETF becomes investable, it experiences a mean reversion of prices and media sentiment, in contrast to the attractive returns shown in its backtested index. This means that while thematic ETFs are good business for the ETF providers, they do not create value for investors on average. Toward the end of our show, we invite Wes Gray from Alpha Architect to talk about their change from index to active ETFs and more. Wrapping up, Wes along with Robin Taub join us for a lively round of Talking Cents. Tune in today!
Timestamps:
0:00 Intro
6:30 Cameron's recommendations
13:58 Thematic ETFs
42:48 Discussion with Wes Gray from Alpha Architect
1:03:40 Talking Cents with Robin Taub and Wes Gray
Books From Today’s Episode:
The Wisest Investment — amzn.to/3BWQfZw
Quantitative Momentum: A Practitioner’s Guide to Building a Momentum-Based Stock Selection System — amzn.to/2XZWFoH
Quantitative Value, + Web Site: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors — amzn.to/2U6GuVh
Chatter — amzn.to/3IAtOwS
Links From Today’s Episode:
Rational Reminder on iTunes — itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582.
Rational Reminder Website — rationalreminder.ca
Shop Merch — shop.rationalreminder.ca
Join the Community — community.rationalreminder.ca
Follow us on Twitter — twitter.com/RationalRemind
Follow us on Instagram — @rationalreminder
Benjamin on Twitter — twitter.com/benjaminwfelix
Cameron on Twitter — twitter.com/CameronPassmore
Wes Gray on LinkedIn — linkedin.com/in/alphaarchitect
Robin Taub — robintaub.com
'Earnings Growth: The Two Percent Dilution' — researchaffiliates.com/documents/FAJ-2003-Two-Percent-Dilution.pdf
'The Big Market Delusion: Valuation and Investment Implications' — tandfonline.com/doi/full/10.1080/0015198X.2020.1730655
'Overconfidence and Speculative Bubbles' — https://www.journals.uchicago.edu/doi/abs/10.1086/378531
'Competition for Attention in the ETF Space' — papers.ssrn.com/sol3/papers.cfm?abstract_id=3765063
'Betting Against Quant: Examining the Factor Exposures of Thematic Indices' — papers.ssrn.com/sol3/papers.cfm?abstract_id=3899750
