Nobel laureate Eugene Fama said, “There’s one robust new idea in finance that has investment implications maybe every 10 or 15 years, but there’s a marketing idea every week.” Recently, the marketing whizzes have been working their magic.
So far this year we've seen a Treatments, Testing and Advancements ETF come to market, ticker GERM, which looks to provide exposure to biotech companies in hopes of capitalizing on the global race for a Coronavirus vaccine. There has also been an ETF launched with the ticker WFH, this is the Work From Home ETF which invests in companies that the manager believes will benefit from an increasingly flexible work environment. Index designer EQM Indexes has created four COVID related thematic indexes: The Stay at Home Index, Work from Home Index, COVID-19 Stock Index, and Global Pandemic Disruption Index which they tout “will prevail post the resolution of the COVID-19 global pandemic.”
While only time will tell how these reactionary investments play out, investors need to realize that these investment fads are nothing new. Looking back at some fads over recent decades can illustrate how often trendy investment themes come and go. In the early 1990s, attention turned to the rising “Asian Tigers” of Hong Kong, Singapore, South Korea, and Taiwan. A decade later, much was written about the emergence of the “BRIC” countries of Brazil, Russia, India, and China and their new place in global markets. Similarly, funds targeting hot industries or trends have come into and fallen out of vogue. In the 1950s, the “Nifty Fifty” were all the rage. In the 1960s, “go-go” stocks and funds piqued investor interest. Later in the 20th century, growing belief in the emergence of a “new economy” led to the creation of funds poised to make the most of the rising importance of information technology and telecommunication services. More recently, strategies focused on cryptocurrencies and cannabis cultivation along with concentrated exchange-traded funds with catchy ticker symbols, like the aforementioned, have garnered attention among investors.
When selecting strategies for their portfolios, investors are often tempted to seek out the latest and greatest investment opportunities. But long-term investors should be aware that letting short-term themes influence their investment approach may be counterproductive.
It is important to remember that many investing fads, and indeed, most investment vehicles, do not stand the test of time. A large proportion of funds fail to survive over the longer term. Based on data from Dimensional’s 2020 Mutual Fund Study, of the 2,992 equity mutual funds around 15 years ago, only 52% still existed at the end of 2019. Similarly, among fixed income mutual funds, only 55% of the 1,658 funds available to US-based investors at the beginning of 2005 are still around today. Compare this to Dimensional, of the 31 funds that were around 15 years ago, 100% of those funds are still in existence today.
Earlier this year we saw that not even a catchy ticker symbol can help a fund survive. In March, Janus Henderson closed two of their ETFs with catchy ticker symbols – The Organics ETF (ORG) and the Obesity ETF (SLIM) after being launched less than 4 years ago in. When ETFs and mutual funds are forced to close or liquidate it is often due to lack of investor interest, limited assets, or poor performance, this puts a burden on the end-investor and may create a tax event, if the funds are held in a taxable account.
Dimensional avoids chasing the shiny object. When we bring something new to the market, it's about helping clients pursue their goals through investment solutions that are backed by robust research.
Fashionable investment approaches will come and go, but investors should remember that a long-term, disciplined investment approach based on research and implementation may be the most reliable path to success in the global capital markets.
