- What are the worst AI ETFs to avoid?
All of 'em.
Don't touch any of 'em with a 10 foot pole.
Unless you enjoy losing your money,
and underperforming the market.
I'll show you why that is.
And give you a better alternative.
But Jared I can make so much money
because this is the future.
Oh, really?
Just like blockchain ETFs.
Clean Energy ETFs.
FinTech ETFs.
A report of the week, food ETF.
Space ETFs.
Robot ETFs.
Cybersecurity ETFs or Metaverse ETFs.
Let me guess.
It's different this time with AI ETFs, right?
I assure you, my friends,
it is not different this time.
The next greatest theme-based ETF
is about as common as Christmas.
They come and they go.
But there's still thousands and thousands
of investors who participate.
With our short attention spans.
It's easy to lose track
of all of these trendy funds
that have popped up over the past few years.
The good news is that we can look back
about 70 years to the 1950s
when thematic funds started popping up.
And that's because
it is very easy to sell the future.
Just so we're all on the same page.
A thematic ETF is a fund that holds
a basket of stocks based on a specific theme.
Think of it like a general sector fund.
But even more niche or niche.
However you pronounce it.
Since some of them will invest
across multiple sectors.
Here's an example
of some of the stocks and AI ETF holds.
I have no idea what half
of these companies have to do with AI.
But the fund manager, for whatever reason,
thinks that these are all winners.
Someone should probably tell this ETF manager
that this isn't the Ironman
and Batman Marvel Technologies.
First, let me give thematic ETF's credit.
If you are a little hesitant
to invest in individual stocks
but still want exposure
to that part of the market.
Then they are a really good solution.
Unfortunately, that comes with a lot of downsides
that are rarely talked about
by the people who pump these things up.
AI and other fatty theme-based ETFs
thrive on hype.
And what I would consider
to be that get rich quick side of our brains.
To prove this point,
we have to look no further
than how dollars flow into these types of funds.
Here's a chart of the fund flows, since 2013.
As the market was skyrocketing in 2020 and 2021,
investors were looking for every penny
under their couch to shove into these funds.
Up until the market started to decline,
and investors stopped putting money
into them in 2022.
What happened?
I thought the stocks
and these funds were the future, bro.
If theme-based ETFs are so terrible,
then why in the world would new ones
continue popping up all over the place?
Because they are extremely, extremely profitable.
Since they charge very high fees
and plan your emotions about the future.
Have you ever thrown spaghetti
against a wall to see if it sticks?
Neither have I,
because I don't want to ruin my walls.
But I hear it's a lot of fun.
It's the same idea with these ETFs.
Most of them know the odds
of success are very low.
But as long as they can stay open.
Long enough to suck money
out of investor's pockets.
It's going to be a net win for them.
How big of a win?
According to Morningstar, as of 2021,
Global Thematic Funds
has $806 billion
in assets under management.
Now, I pulled the expense ratio
of 50 of these ETFs.
And based on the 0.68% average price,
that is a yearly income
for the industry of $5.4 billion with a B.
With this much money up for grabs.
Every single wall in my house,
and my friend's houses
would be covered in spaghetti, if I were them.
These ETFs are money making machines.
And basically only exist
to make the fund companies rich and you poor.
The people who invest in them
are the definition of dumb money.
Jack Bogle once wrote,
in the casino, the house always wins.
In horse racing, the track always wins.
In the Powerball lottery, the state always wins.
Investing is no different.
In the game of investing,
the financial industry always wins.
And the investors as a group, lose.
Like I always say,
incentives drive behavior.
The more funds they can create,
the more money that they can make.
You have better odds of walking down the street
and getting pooped on by a bird.
While you stepping gum on the sidewalk
than you are to make money in this kind of ETF.
Okay, you caught me.
I just made that up.
But either way the odds an investor
will successfully pick a thematic ETF
that will survive and outperform
is really, really bad.
Morningstar found that over a 15 year period,
78% of all thematic funds
were liquidated or merged
because they either performed terribly.
Or they couldn't get enough people
to invest in it.
Another 12% survived,
but lagged to the global market index.
And a little less than 10%
both survived and outperformed
the global stock market benchmark.
Think about this for a second.
That is a 90% failure rate.
In what world would you wanna be a customer
of a product that had a 90% failure rate.
And that charged you 22 times
more than a simple index based ETF?
Except in this case, we are not talking
about a normal consumer product.
We're talking about you, basically gambling
with your hard-earned money and financial future.
Investing is more about probabilities
than it is possibilities.
Is it possible for you to invest
in say an AI or other theme-based ETF
and outperform?
Absolutely, but it's not very likely.
Especially over long periods of time.
Luck masquerades itself as skill
in the short term
But reveals itself over the long term.
Some of you may have been lucky up to this point
by investing in a theme-based ETF.
So you might want to potentially think about
taking that W and getting out
while you're still ahead.
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If we look at this graph,
and zero win on the three year timeframe.
We see that a little over 50%
of those funds outperform.
Some of you might be wondering,
what's the harm in investing
in one of these things
for the short term to try to gain an edge?
You could.
But then, we have to get
into the conversation of market timing.
When do you get into that ETF to outperform?
How do you know when to sell at the right times
so that you will end up outperforming?
How do you know which ETF will outperform
before it actually does?
There's so many variables.
And you have to get it 100% correct.
In all three of those areas to make money.
Plus, what's the potential upside?
A few percentages of outperformance, one time.
Cool story, bro.
How much did you really make?
A few hundred or a few thousand dollars?
I bet most of you aren't investing
large enough amounts of money
for this outperformance to even positively
impact your portfolio.
But the downside is worse.
Not just for the fact
that there's a high likelihood
that you'll end up underperforming the market.
But because losing money hurts
more than making money feels good.
We also have to remember that these ETFs
typically hold a relatively small number
of stocks focused on a specific theme.
Of the random 50 that I pulled data on.
The average holding was 95.
And the median was 78.
This limited diversification
means that you are introducing
additional levels of risk
to your overall portfolio.
Since more of your money is concentrated
into a small number of companies within the fund.
Sure, you can add one of these ETFs
to an already diversified portfolio.
But if you had a properly
diversified portfolio to begin with,
then you already have exposure
to every stock that you'd find in it.
By putting money into one of these ETFs,
you are actually overexposing yourself
to those stocks
and reducing your diversification.
Which is automatically
going to increase your risk.
Based on all of the research
and data that I've looked at.
Theme based ETFs are not worth it.
The best alternative to a thematic ETF
of any kind, is a simple
broad-based portfolio mix.
Like a total US stock fund.
And total international stock fund.
Which I go through in this video.
Link above my head and down
in the description below.
Holding these two funds, already has you invested
in any company, that's either
directly related to a theme,
or will benefit from it in another way.
It's okay to believe that something
is going to change the world
and not invest into it directly.
Especially when you don't actually know
how things are going to turn out.
Which most people don't.
Because we can't see into the future.
I'm someone who is a firm believer
in the benefits of mushrooms.
I have had enough experiences with them.
And know other people who have as well.
To the point where I think
it could change the world.
But there's no way in heck
that I would ever invest
in that type of theme-based ETF.
Between now and the day that you stop investing,
you are going to get thematic funds
marketed to you because they paint
such a bright future.
Herds of people will sing the praises of them.
And pile in a hand over fist.
The madness of crowds
will consume everyone around you.
It might even get to the point
where you start thinking,
that you are crazy for not investing.
At least a little bit of money into 'em.
When this happens, I want you to remember
what Jack Bogle once said.
Don't do something.
Just stand there.
You don't have to hop on every single
freaking trend that pops up.
You have my permission
to sit back on the sidelines
and watch everyone act like a bunch of sheep.
You can also feel comfortable
not putting your money into these funds.
Because you understand that the high risk
isn't worth the low potential reward.
At the end of the day,
what's going to make you rich
is getting out there, earning more money.
Shoving that money into a diversified portfolio,
that holds a little bit of everything
across the world.
Then repeat the process
over and over and over again.
Check out my top five ETFs
in this video to your left.
More ways to help you with your money.