During times of bull markets, investors, including our clients at times, tend to underestimate the real risk in the market and become more reckless. It is at these times that they begin to be less patient with the more defensive portions of their diversified portfolios and to tend towards more speculative investments.
However, the mood of customers and markets can turn upside down. In bearish markets, the reflex is to drop your volatile stocks and take refuge in more conservative investments.
In short, in times of decline, the investor is motivated by fear, and in times of rise, by greed.
Recently, it seems that this latter phenomenon has propelled risk-taking in the market. And this situation prompts me to be cautious.
If you have the sense of adventure, there is a growth in the number of small firms issuing ETFs who would like to give you big emotions. Indeed, many of them offer thematic ETFs, even if the largest ETF manufacturers also offer them.
This situation is not the result of chance. Historically, big, long-established industry players such as BlackRock, Vanguard, State Street, BMO Global Asset Management, etc. have served the ETF segment with exposure to more traditional asset classes well. These firms have largely ignored “flavor of the month” ETFs, relying instead on the ESG theme (environmental, social and governance factors) for their future growth. It is mainly the smaller and newer ETF firms that are behind the offer of thematic ETFs and that allow you to participate in the very latest sensations. A new firm seeking market share would find it extremely difficult to compete with established players on the traditional asset class table. They therefore rely on niche products that are not of particular interest to large firms.
Here are some popular thematic ETFs these days.
Let’s start with cryptocurrencies. They leave no one indifferent. Some see it as the greatest monetary innovation of the last century, giving back to the people the power of exchange for too long monopolized by large institutions, governments and the ruling class.
Others see it as the greatest silliness of the last century, perhaps even a scam orchestrated by a small anonymous group that is mostly used by organizations with an unenviable reputation to negotiate in regulatory obscurity. Only the future will tell us what it really is. No matter which camp one is in, it is possible in Canada to participate in the crazy variations of bitcoin thanks to the BTCC ETF of the firm Purpose. Other Canadian manufacturers offer it, including Evolve and CI Investments.
Sometimes, the investor can be very successful thanks to these thematic or hyper-targeted products. However, this is not always the case. Cryptocurrency is a good illustration of the appeal of “must-see” trades. We remember the pathetic stories of small speculators who lost everything by betting what they had in order to be part of the rising wave of bitcoin in 2017-2018.
Therein lies the danger of thematic investments which fuel the popular frenzy, multiplied by the exhilarating campaigns carried out on social networks. We had better be among the first to participate in these speculative bubbles. Everyone else is there only to help the bubble inflate, although it will deflate when the first comers decide to take their profits, before they can avoid huge losses.
Van Eck’s BUZZ ETF offers to invest in the most talked about stocks on social media, such as REDDIT, StockTwits and Twitter. This ETF holds 75 US securities and, to date, has US $ 500 million in assets under management. It also invests in blank check-type stocks, better known by their acronym SPAC (special purpose acquisiton company). These companies have no commercial activity and are formed strictly to raise capital for the purpose of buying an existing business. Generally, we know in which sector they are aiming to make an acquisition. PSPCs are used by start-ups to raise capital.
The UFO ETF of the firm Procure invests in everything related to the conquest of space.
For fans of professional sports, there is the MVP FNB from Roundhill Investments. It invests in professional sports teams, leagues, sports networks, and… PSPCs. Are you worried about a return of inflation? You could use Horizon Kinetics Asset Management’s INFL which tries to identify those companies that could benefit from a pickup in inflation. There is no PSPC!
A FOMO ETF? Why not !
The popularity of thematic ETFs seems to be linked to the FOMO (fear of missing out) syndrome, characterized by the fear of missing something important.
Why not close the loop by offering an ETF that allows you to invest in all the hot topics at once? The small firm Tuttle Tactical Management will try to attract the interest of investors for the very latest fashions with its ETF obviously bearing the symbol… FOMO. The firm recently applied for registration with the Securit ies and Exchange Commission. Tuttle offers to apply momentum filters on everything that moves to invest in the most popular themes among investors. For example, it would currently be invested in momentum stocks, Gamestop, BlackBerry, and other titles popular on social networks, cryptocurrencies, hydrogen… and PSPCs.
It is made so affordable and relatively simple to issue a new ETF in the United States if one is willing to share the management income with one of the many firms that specialize in marketing support. It almost sounds like a catchy acronym is all it takes to get some to jump into the ETF industry.
These products represent a level of risk never seen in the past. ETFs with increased concentration, such as sector ETFs, or volatile asset classes have been around for a long time. These ETFs are admittedly more volatile, but allow the investor greater precision in allocations when used in a moderate way. They also allow the convinced investor to take a position whose level of risk is not for everyone. However, the new FOMO products play on a whole new dimension, namely the emotion of the investor and the fear of missing the new sensation. This makes them riskier and makes them products that should be used with a lot of caution.
Guy Lalonde is an investment advisor, portfolio manager