Beware Thematic ETFs | The Investors Edge

By John Stewart, chief investment officer at Farmers Trust Co.

Week in Review: Falling Inflation Keeps Markets Moving Higher

Inflation was 0.2% in June, which was less than the three-tenths increase expected. Over the past year, the inflation rate was 3.0%, marking its lowest year-over-year reading since March of 2021.

Markets cheered the continued improvement in price pressures with both stocks and bonds rallying more than one percent in the wake of the report.

Inflation is certainly one factor in determining the health and trajectory of the economy and stock market, but it is by no means the entire story.

If the falling rate of inflation is accompanied by, or even a sign of slowing, or potentially contracting economic growth, a reduction in corporate earning power and future earnings estimates is on the way.

That is by no means a recipe for higher stock prices. Corporate earnings estimates have actually been falling for the past year. Until that trend changes, downside risks remain as we move further into the second half of the year.

Featured Insight: Beware Thematic ETFs

For anyone that doesn’t know, ETF stands for exchange-traded fund, and is basically a basket of securities that trades on the exchange just like an individual stock.

You can buy ETFs that track broad market indexes like the S&P 500, ones that track sectors like technology, or even specialized thematic ETFs that invest around a certain trend or theme, like A.I., the trend toward EVs, or Alternative Energy.

These themes may or may not be attractive investment opportunities, but the ETFs that represent a narrow niche require extra scrutiny.

For one, many are quite expensive, carrying a higher-than-average expense ratio, which is deducted from the value of the fund. Additionally, these funds may be concentrated in just a few stocks, or have allocations that aren’t as representative of the particular theme as they might appear on the surface.

I’m not saying that all thematic ETFs are bad – just make sure to do your homework so that you know exactly what you’re buying.

Looking Ahead: August and September

Mark Twain is quoted as saying that October is a peculiarly dangerous month to speculate in stocks, but then goes on to list all the other months as dangerous as well.

While the month of October is known for some famous stock market crashes, the only two months that have averaged negative rates of return for the broader market are August and September.

So enjoy July while it lasts, because we’ll soon be entering the weakest seasonal period for equities.

Could this year continue to surprise to the upside? Absolutely! On the other hand, if you’ve been riding the stock market wave higher, it might not be a bad time to do some portfolio rebalancing by harvesting some gains and moving the proceeds into assets that are more conservative or have underperformed this year.

Copyright 2024 The Business Journal, Youngstown, Ohio.