Why Getting the Trend Right Still Doesn't Make You Money

Everyone knew cars would change the world by the early 1900s. Everyone knew the internet would upend every industry by the late 1990s. Here’s the strange part: a lot of people who called those trends correctly still lost money. Let me give you the conclusion first, because it matters more than anything else here: correctly predicting a trend and profiting from it are two completely different skills. I used to think that if I was confident an industry was about to take off, I’d already won half the battle. Watching thematic funds launch, gather assets, and quietly disappear over the years taught me otherwise — getting the direction right and still ending up in the red happens far more often than most people assume.

Thematic funds are concentrated bets wearing a diversification costume

A thematic ETF or fund usually holds 30 to 50 stocks, sometimes more than 100, so at a glance it looks reasonably diversified. Here’s the catch: if every one of those holdings is exposed to the same industry, the same regulatory environment, the same investor sentiment, and the same fund flows at the same time, the stock count is almost beside the point — you’re making one bet, not many. When bad news hits the industry, 30 stocks or 100 stocks move together.

In my experience, this is the trap people fall into most easily: “I didn’t put everything in one stock, I spread it across a fund, so I’m diversified.” But diversification isn’t about how many tickers you own — it’s about combining assets that don’t move in the same direction at the same time. Adding more names inside the same industry doesn’t break that correlation; it just hides it.

If it’s already in the news, it’s probably already in the price

Notice when thematic funds actually launch. Usually it’s after the industry has already been a headline story for years, after the articles have piled up, after search interest has peaked. Fund flows are a lagging indicator of a trend, not a leading one. By the time enough people are confident enough to put money in, a good chunk of the optimism about that theme is likely already reflected in prices.

There’s research behind this. Ben-David, Franzoni, Kim, and Moussawi (NBER Working Paper 28369, Review of Financial Studies 2023) tracked specialized sector and thematic ETFs after launch and found roughly -30% risk-adjusted performance over the following five years. That timing itself is a signal — a launch date often coincides with a theme’s popularity being close to its peak, not its beginning.

This connects to a broader principle: strong earnings don’t automatically predict future returns, because good news only pays off when it isn’t priced in yet. Extend that logic to capital flows, and the same holds — money that’s already poured in is rarely the raw material for the next leg of gains.

Why calling the trend right still isn’t enough — the real problem is picking the winner

This is the part that matters most. Say you nail the industry call perfectly. You can still lose money, because whether an industry grows and which specific company inside it survives to capture that growth are two entirely different questions. And early on, nobody can answer the second one reliably.

This isn’t unique to thematic investing — it’s a structural feature of stock markets in general. Bessembinder (2018, Journal of Financial Economics) examined essentially every U.S.-listed stock from 1926 to 2016 — roughly 25,967 of them — and the results are sobering. About 57.4% of stocks underperformed one-month Treasury bills over their lifetime. Stocks that were eventually delisted had a median lifetime return of roughly -92%. And virtually all of the net wealth the U.S. stock market created above Treasury bills over that 90-year span came from the top roughly 4.3% of stocks — about 1,092 companies. Put differently, across nine decades of U.S. public markets, most listed companies either did nothing for shareholders or actively destroyed value.

History’s biggest thematic booms show the same pattern:

Sources: automobile manufacturer count, EBSCO Research Starters; dot-com survival rate, University of Maryland’s Robert H. Smith School of Business.

In all three cases, the trend itself was completely correct. Cars really did change the world. Railroads really did connect continents. The internet really did reshape every industry. The forecasts weren’t the problem — the inability to identify, early on, which specific companies would survive to capture that growth is what wiped out a huge share of invested capital.

Whenever you catch yourself thinking “this time is different,” it’s worth remembering that people in every one of those eras believed the exact same thing. Owning the industry broadly — the same logic behind why index funds tend to beat individual stock-picking over the long run — is a different bet than trying to hand-pick the eventual winner. Get the trend right while trying to do the latter, and the outcome is close to a coin flip.

The actual track record — and the survivorship bias hiding inside it

So how have real thematic funds actually performed? According to Morningstar’s thematic fund landscape research, only about 9% of thematic funds beat the broad market over a recent 3-year stretch (about 22% did over the most recent 1-year period). Zoom out to a full 15 years and the picture doesn’t improve — historical success rates have hovered around 14% to 18%, and more than half of thematic funds didn’t even survive that long. The rest were either liquidated or survived while trailing the market.

This is where survivorship bias matters. Underperforming funds usually get shut down quietly — they don’t show up when you search for “successful thematic funds” today, because the failures have already been filtered out of view. It’s a similar mechanism to the psychological biases that show up during market crashes — we remember the stories that survived and rarely encounter the ones that quietly didn’t.

The gap shows up in investor returns too. Per Morningstar’s research, the time-weighted total return of thematic funds themselves averaged around 7.3% over the five years through mid-2023, but the dollar-weighted return investors actually realized — which accounts for when money moved in and out — was only about 2.4%, a gap of roughly -4.9 percentage points. That’s the fingerprint of people buying near a theme’s peak and selling once the drawdown became uncomfortable.

That asymmetry — a small sliver of winners generating essentially all of the return — is exactly why picking the wrong company (or the wrong fund at the wrong time) inside a correctly-called trend still ends in a loss.

If a theme still tempts you, run this checklist first

None of this means thematic investing is off-limits. It means you owe yourself honest answers to a few questions before putting money in.

1. Has this already been in the news for years? If articles about the theme have been piling up for a while, the optimism is likely already baked into prices.
2. Can you actually identify the eventual winner inside that industry? If not, owning the industry — or the broad market — is a structurally different bet than picking individual names.
3. If this bet is wrong, can your overall portfolio absorb it? If the position is sized so large that a wrong call would hurt, that’s already your answer.
4. Do you know the history of past themes — cars, railroads, dot-coms? If this article is the first time you’ve seen those numbers, that’s worth sitting with.
5. Is this theme clearly separated from your core asset allocation? Getting the basics of asset allocation right first is what keeps a thematic bet a small, contained slice of the portfolio rather than the whole thing. The balance between growth and value investing is worth a similar gut check.

If you can’t comfortably answer all five, that’s a sign you’re not quite ready — and there’s no shame in that. Learning to properly evaluate investment risk first is a more useful next step than chasing the next hot theme.

Key takeaways

• Thematic funds hold many tickers but often carry concentrated exposure to one industry, one regulatory environment, and one set of fund flows — closer to a single bet than true diversification.
• By the time a theme is newsworthy enough to launch a fund around, the optimism is often already priced in (specialized ETFs showed roughly -30% risk-adjusted performance over the five years after launch).
• Calling the trend right isn’t enough — picking the eventual winner inside it is the hard part. About 57.4% of U.S.-listed stocks underperformed T-bills, while the top roughly 4.3% created essentially all the net wealth.
• Automobiles (roughly 83% of manufacturers gone), railroads (dozens bankrupt within a year of the Panic of 1873), and dot-coms (roughly 52% gone) all prove the trend can be completely right while most individual companies still disappear.
• Only about 9% of thematic funds beat the broad market over a recent 3-year stretch (roughly 14%-18% do over a full 15 years, and more than half don’t even survive that long); investors’ realized returns also trailed fund returns by roughly 4.9 percentage points — a signature of survivorship bias and bad timing.
• If a theme still interests you, size it small, keep it separate from your core allocation, and go in with eyes open.

Frequently asked questions

Is thematic investing worth doing? Not necessarily off-limits, but you should go in aware of two things: thematic funds are structurally closer to a concentrated bet on one industry than to real diversification, and by the time enough money is flowing in, a good deal of optimism is often already priced in. Getting your core asset allocation right first, then sizing any thematic position small, is the more realistic approach.

Why do thematic ETFs tend to underperform the market? Research by Ben-David, Franzoni, Kim, and Moussawi (NBER Working Paper 28369, Review of Financial Studies 2023) found that specialized sector and thematic ETFs delivered roughly -30% risk-adjusted performance over the five years after launch. Launch timing itself tends to coincide with a theme’s popularity being near its peak, and money typically arrives after the optimism is already reflected in prices.

What exactly is concentration risk in thematic investing? A thematic fund might hold 30 to 50 stocks, sometimes over 100, which looks diversified on paper. But if every holding is exposed to the same industry, regulatory environment, investor sentiment, and fund flows at the same time, it behaves like a single bet rather than many. When bad news hits that industry, the whole fund moves together regardless of the stock count.

Can you lose money even if you correctly predict the trend? Yes, and it happens often. Whether an industry grows and which company inside it survives to capture that growth are separate questions. Automobile manufacturers went from roughly 253 around 1908 to about 44 by 1929 (roughly 83% gone), dozens of railroads went bankrupt within a year of the Panic of 1873 and more followed as the Long Depression dragged on, and roughly 52% of dot-com companies had disappeared by the end of 2004. In all three cases, the industry trend itself was completely correct.

Do thematic funds get liquidated more often than regular funds? According to Morningstar’s thematic fund landscape research, only about 9% of thematic funds beat the broad market over a recent 3-year stretch (about 22% did over the most recent 1-year period). Stretch the window to a full 15 years and it’s just as bleak — historical success rates have hovered around 14% to 18%, and more than half of thematic funds didn’t even survive that long. Because underperforming funds tend to disappear quietly, the examples that remain visible today are a survivorship-biased sample.

I still get excited when I hear about a promising new industry — that hasn’t changed. What has changed is that before I act on that excitement, I ask myself one question first: can I actually identify the winner inside this story? That single question is what separates people who call the trend right and still lose from people who build wealth steadily, regardless of which theme is hot this year.

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