The Rational Reminder Podcast Lighting your Money on Fire with Thematic ETFs (EP.185)
Jan 27, 2022
Wes Gray, co-founder of Alpha Architect and a well-regarded figure in finance, joins the discussion on the evolving world of ETFs. He dives into the pitfalls of thematic ETFs, suggesting they often fail to deliver on their promising backtested returns, especially as popularity grows. The conversion of mutual funds to ETFs is explored, emphasizing tax benefits and efficiency. Wes also shares insights about Bitcoin ETFs’ potential, and the conversation wraps with a lively debate on financial literacy and the psychology behind investor decisions.
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Episode notes
Thematic ETFs Thin Profits
- Investing in thematic ETFs usually means buying into highly optimistic, competitive markets.
- This results in thinner profit slices for each company and high prices that often fall later.
Thematic ETFs Follow Mean Reversion
- Thematic ETFs often launch after the peak of excitement and returns.
- After the launch, prices and media sentiment usually revert to more normal levels.
Investor Overconfidence Drives Bubbles
- The excitement around big market themes leads to highly optimistic investor expectations.
- These inflated expectations cause stock price bubbles and eventual sharp value corrections.
