The Four Elements Thematic ETF Portfolio
Tony Dong | Dec 20, 2024 11:41AM ET
You’ve probably heard of thematic ETFs—funds that target specific trends, ideas, or industries instead of sticking to broad market or sector exposure.
There’s a wide range of quality in this space. Some thematic ETFs are genuinely solid, like the Global X US Infrastructure Development ETF (ASX:PAVE) and the Global X Defense Tech ETF (NYSE:SHLD). These funds focus on long-term themes with real tailwinds behind them.
With a 0.60% net expense ratio, the fund’s top holdings primarily come from the U.S., Denmark, Canada, and Germany, with most being utilities—making FAN relatively rate-sensitive.
The earth component
This one was the easiest—just use a mining ETF. The SPDR S&P Metals & Mining ETF (NYSE:XME) does the job well. XME is one of the better-capitalized funds on this list, with $1.7 billion in AUM, and it’s also more affordable, with a 0.35% expense ratio.
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The ETF tracks the S&P Metals & Mining Select Industry Index, an equal-weighted benchmark that includes equities in aluminum, coal & consumable fuels, copper, diversified metals & mining, gold, precious metals & minerals, silver, and steel from the S&P Total (EPA:TTEF) Market Index.
Because it’s equal-weighted, top holdings will always reflect whichever companies have outperformed between rebalances, so there’s no point in analyzing specific holdings here.
Putting the portfolio together
A portfolio of 25% each in TAN, PHO, FAN, and XME would have returned an annualized 2.24% from June 27, 2008, to December 13, 2024. For context, the S&P 500 delivered a much stronger 12.00% over the same period.
It’s not just about returns, though. The Four Elements Portfolio had terrible risk metrics, with a standard deviation of 29.34% and a max drawdown of -70.33%. Compare that to the S&P 500, which had a standard deviation of 19.97% and a max drawdown of -47.17%.
Unsurprisingly, the risk-adjusted returns tell the same story: a Sharpe ratio of 0.18 for the Four Elements Portfolio versus 0.61 for the S&P 500.
The blatantly obvious lesson here? Don’t throw ETF portfolios together haphazardly! Yes, this one was silly, but I’ve honestly seen similar—or worse—ideas floating around Reddit.
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