In the stock market, not every company goes up or down at once, often times the companies move up and down according to themes. The most popular theme is AI, but themes are consistent throughout the market. There are potential new weight loss drugs, when interest rates go down it is possible more people will buy homes which helps Home Depot and Lowes among other companies. There are macro trends which tend to affect some companies more than others. One method to be in the group is to buy an index fund tied to the theme. The index funds have relatively low cost, the funds should have some diversification within the group, and when they are introduced to the public there is great hype and positive results. Some of the funds are successful, but how are the performances in the long-term?

In an article by Bansari Mayur Kamdar of Reuters, Morningstar Research used their wide ability to do analysis of the funds and many investors left over 2/3s of the potential gains on the table due to badly timed trades.

One of the problems with buying a theme fund is the first desire of the investor is to make money. How much money is the issue. Theme funds have doubled their assets under administration (AUM) since 2018, Morningstar Research data shows.

In a 5-year period, theme funds had an annualized 7.3% return from June 2018 to June 2013, but investors saw a 2.4% return according to a report by senior analyst Kenneth Lamont.

The S&P 500 index returned 14% annually.

The report attributed the disparity in earnings to poor market timing. Results were bad in more volatile funds where investors tended to trade more frequently and bought high and sold low.

Linking to dividend paying stocks, investors in these stocks tend to have a longer horizon period to expect better returns. With the S&P 500 index, the index company takes out the losers and replaces them with winners twice a year, which tends over the longer term to allow the funds to have better returns. Theme funds do well when the market is pushing them, but they tend to go out of favor and prices fall until they are back in favor. Sometimes boring is better.

There are more questions than answers, till the next time – to raising questions.