Work-from-home ETFs latest thematic funds to face reckoning

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The work-from-home (WFH) phenomenon that began during the COVID-19 pandemic meant that white-collar workers, en masse, went from being commuters to remote workers almost overnight. Investors and fund companies saw an opportunity.
But the shine on that investment strategy is fading as the pandemic recedes and more employers mandate returns to the office.
The first casualty is one of BlackRock Inc.’s exchange-traded funds (ETFs) launched at the height of the pandemic in September, 2020. The fund company is shuttering its iShares Virtual Work and Life Multisector ETF IWFH-A. The fund, which has just $3-million in assets under management (AUM), hit a peak of US$35 a unit in February, 2021, but is now trading just shy of US$15. Its average annual return since inception as of June 30 was -12.44 per cent.
This is a familiar path for many thematic ETFs, says Benjamin Felix, portfolio manager and head of research with PWL Capital Inc. Fund companies saw the “hot theme” of working from home at the start of the pandemic and “launched a product at that peak of excitement, after stock prices usually have already gone up for that sector,” he explains. Over time, asset prices decline, the fund doesn’t perform well and the fund company shutters it.
Thematic ETFs are “easy to buy into because they tell a story, something you can relate to, and that’s what they’re designed to do … so they’re hot sellers,” says Ian Tam, an investment specialist with Morningstar Canada. “But performance has been lacklustre.”
For the everyday investor, thematic ETFs should only be “a satellite position,” he adds.
The closing of BlackRock’s fund isn’t about the work-from-home theme specifically, says John De Goey, a portfolio manager with Designed Wealth Management. Rather, it’s more about fund companies launching products and trying to gather assets.
“If it works – great – and if it doesn’t – well, too bad, so sad. We’ll just come up with a new theme and a new idea and see how that goes,” he says.
There are three bets investors make when they invest in a thematic ETF, Mr. Tam says. The first is they’ve chosen the right theme. The second is the theme isn’t already overvalued. The third is they’ve chosen the right manager as several similar ETFs often launch at the same time.
The payoff can be huge, he says, “but for the most part, it’s a tough bet to make.”
Many thematic funds don’t survive. A 2022 Morningstar Inc. report found that during a 15-year period, three-quarters of global thematic funds closed and only one in 10 survived and outperformed.
“For the everyday investor, you might be better off being boring and just buying a broad-based index fund,” Mr. Tam says.
The performance of the few WFH ETFs that exist is held back mainly by the smaller stocks in the funds, which tend to drag down performance, Mr. Tam says.
Direxion Work From Home ETF WFH-A is the largest WFH ETF with US$27.4-million in AUM. It’s trading close to US$55 a unit, just above its price of US$48 when it launched. Harel HTF Index Work From Home currency hedged ETF, based in Israel, has about $2.3-million in AUM. Emles @Home ETF (LIV) closed in 2022.
The closure of BlackRock’s WFH ETF doesn’t mean the stocks included in the work-from-home ETFs are duds, Mr. Felix says. Some of the funds include companies such as Microsoft Corp. MSFT-Q, Amazon.com Inc. AMZN-Q, and Nvidia Corp. NVDA-Q, as well as Zoom Video Communications Inc. ZM-Q and Peloton Interactive Inc. PTON-Q.
Those companies are not failing – even if Zoom and Peloton were bid up crazily during the pandemic and have fallen sharply, Mr. Felix says. However, they can be owned with a broad-based index ETF instead of a narrow thematic fund.
And many stocks related to the WFH theme may still be relevant, Mr. De Goey adds. If you look back at the dot-com boom and bust, he says, the theme that the internet would be a huge driver of business hasn’t changed. Those stocks were just bid up unrealistically at that time.
The remote-work phenomenon is here to stay, just not at the same level that occurred during the pandemic, he notes.
Ark Investment Management LLC, led by Cathie Wood, had huge success during the pandemic as her Ark Innovation ETF ARKK-A tapped into a theme of disruptive technologies and rose to about US$155, but is now trading at about US$45.
Unfortunately, many investors jumped in at the height of the market and have watched the fund decline, Mr. Felix says.
“If you’re excited about an investment, it’s probably not a good sign,” he says, adding that many people hang on to an investment for too long hoping it will reach its previous heights or at least break even.
Mary Hagerman, senior portfolio manager with Raymond James Ltd. in Montreal, says thematic ETFs are more appropriate for momentum investors who want to jump on a trend early and ride it higher. The ETFs should account for no more than 5 per cent of a portfolio.
“With these types of investments you can easily get swept up by the crowd,” she says.
Waning interest doesn’t necessarily mean an underlying theme isn’t credible, she notes, “but that’s when you need to do your homework and you need to time your entry into these investments,” as well as pick an exit point or plan how to reduce exposure. Or, investors need to have long-term conviction for the theme because these ETFs can be volatile and it can take a long time before they rise again after a sharp decline.
However, an investor holding a broad Nasdaq index ETF would have had better performance than the narrow technology or WFH ETFs, she adds.
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