Investors, Consider the Risks of Chasing After Hot ETFs

There are times when a specific investment theme or market segment begins to shine and garner a lot of attention. While it may feel like you’re missing out if you don’t jump into these trades that are quickly gaining momentum, exchange traded fund investors should refrain from seeking out hot trades.

Jun Zhu, a co-portfolio manager for the Leuthold Core Investment Fund and a senior analyst at the Leuthold Group, found equity-focused ETFs that experienced big inflows as a percentage of assets under management over a short time period typically underperformed funds with average inflows, reports Debbie Carlson for the Financial Advisor.

“It’s just something that you want to keep in mind when you are trying to build your portfolio, to probably avoid certain ETFs which are really hot,” Zhu told FA.

Fund-flow effect and performance

Zhu looked at how the fund-flow effect and performance appeared for the various ETF asset classes over six-, nine- and 12-month periods from April 2006 through April 2018, and she found that funds with the biggest inflows underperformed over all return horizons.

Over the 12-year study period, individuals who invested equally weighted in equity ETFs with the highest inflows experienced an 8% loss.

“We know equity investors, especially with retail investors, have the tendency to chase returns,” Zhu said.