Why Thematic ETFs Make Me Nervous
Yahoo Finance ·
When it comes to investing, exchange-traded funds (ETFs) are near the top of my list. That's why I'm surprised by how nervous thematic ETFs make me. While I'm all about broad-market ETFs, those tracking a single sector immediately raise caution flags. I know how valuable ETFs can be for building a diversified portfolio . However, here are some red flags I need to come to terms with before investing in a thematic ETF. Here's where I get stuck. I've noticed that thematic ETFs typically launch when a specific trend has already captured public imagination. By the time an asset is considered a disruptive innovation (like cloud computing in 2011), institutional investors and early adopters have already driven up the underlying stocks. People like me -- who tend to scour the field before deciding what I want to add to my portfolio next -- buy in just as valuations hit the stratosphere. When it comes to thematic ETFs, I have to ask myself whether I'm buying into the fund's underlying fundamentals or the hype.
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