One question that pops up from time to time is regarding investment fads. Nobel laureate Eugene Fama once said, “There’s one robust new idea in finance that has investment implications maybe every 10 or 15 years, but there’s a (new) marketing idea every week.” Recently, the marketing whizzes have been working their magic trying to sell a new product based on the impact of COVID-19.
So far this year we have 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. More recently, strategies focused on cryptocurrencies and cannabis cultivation along with concentrated exchange-traded funds with catchy ticker symbols, 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 do not stand the test of time. A large proportion of mutual funds and ETFs fail to survive over the longer term. 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. 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 taxable event.
Fashionable investment approaches will come and go, but investors should remember that a long-term, disciplined investment approach is the most reliable path to investment success.