What goes up must come down, even for a rocket company and the many thematic ETFs it boosted.

SpaceX dominated the headlines for weeks with its highly anticipated initial public offering in June, and several space-themed ETFs reaped the benefits. But now that the stock of Elon Musk’s company has fallen 38% from its all-time high to trade close to its $135 IPO price, those funds are feeling the Earth’s gravitational pull. The Tema Space Innovators ETF (NASA) has plummeted back almost to its late-March launch price. The State Street SPDR S&P Kensho Final Frontiers ETF (ROKT), which doesn’t hold SpaceX, has fallen too, as have the Procure Space ETF (UFO) and ARK Space & Defense Innovation ETF (ARKX).

The broad declines underscore the risks of thematic funds, which focus on everything from AI to energy and cannabis, and have become increasingly popular among investors thanks to their ability to offer exposure to niche areas of the market via an easy-to-use and often low-cost wrapper. But they also appeal to investors’ worst instincts and can lead to poor outcomes, even when the underlying theme ultimately succeeds, says Kenneth Lamont, principal in manager research for Morningstar UK.

“Investors are generally poor at timing markets, and this challenge is particularly acute in thematic investing,” Lamont said. “Many thematic funds are launched during periods of intense excitement, encouraging investors to buy in at elevated valuations, often just before a significant market correction.”

No Ticket to Space

The recent performance surrounding the SpaceX IPO highlights an important distinction between having an investment thesis and simply buying into a theme, explained Matthew Smart, director of financial planning and portfolio analysis at WWM Investments.

“Investors may have been excited about SpaceX, but purchasing a space-themed ETF is not the same as investing in SpaceX,” he added. “It’s a reminder that investors aren’t buying one company, they’re buying an entire portfolio, and the success of that portfolio depends on much more than a single headline name.”

That’s not to say investors should shun thematic funds:

• Thematic ETFs can certainly have a place in portfolios, particularly when an industry is still developing and clear long-term winners have yet to emerge, Smart said.
• Lamont said that the odds of selecting a winning thematic manager are stacked against investors. But for those who choose to invest in thematic funds, maintaining valuation discipline and adopting a long-term buy-and-hold approach can help curb some of the key risks.

Lessons Learned. The sell-off of SpaceX and funds that hold its stock may serve as a warning to investors as Wall Street readies for the debuts of other mega-cap unicorns, including OpenAI and Anthropic. “When performance deteriorates, investors frequently panic and sell, crystalizing losses,” Lamont said. “The inherently higher volatility of thematic funds amplifies the consequences of these behavioral mistakes.”

Keep it simple. Keep it safe.

Ultra-short-term bond ETFs, which invest in bonds with durations of less than a year, work to do both, providing low risk and high liquidity. Of course, there’s a drawback: A side effect of the strategy is that it caps returns far below those of longer-term funds, historically curbing inflows during periods of stable economic growth.

Investors, however, have apparently had a change of heart during the spiking volatility of the past 18 months, driven by trade wars, sticky inflation and soaring oil prices due to the US war with Iran. A case in point is the industry’s largest ultra-short bond ETF, which is racing toward the $100 billion mark. If (and more likely when) the iShares 0-3 Month Treasury Bond ETF (SGOV) reaches that milestone, it will be the first in its class to do so, per a report from ETF.com. Unless current market dynamics shift, SGOV is likely to go even higher and could eventually rival the likes of the $160 billion Vanguard Total Bond Market ETF (BND) and iShares’ own $139 billion Core US Aggregate Bond ETF (AGG), both of which have longer durations of more than five years.

Short’s the Word

Even compared with other ultra-short bond ETFs, SGOV’s holdings are strikingly short-term. It invests exclusively in 0-3 month US Treasury bills and boasts an expense ratio of 0.09%, with yields that track closely to the benchmark Federal Funds Rate, currently 3.50% to 3.75%.

SGOV’s peer funds are quite a way behind:

• The next-biggest fund in the category is the SPDR Bloomberg 1-3 Month T-Bill ETF (BIL), per ETF.com, with $46.6 billion in assets and a 0.14% expense ratio.
• The Vanguard 0-3 Month Treasury Bill ETF (VBIL), which launched last year with an expense ratio of 0.06%, has already grown to nearly $10 billion.

Not all funds in the category focus on quite such a short timeline. Vanguard’s Ultra-Short Bond ETF (VUSB), for example, is an actively managed fund with a broader mandate, holding both short-term US Treasuries and high-quality corporate bonds with a longer duration of about a year.

What About Money Market Funds? Ultra-short bond funds are often compared with money market funds, as both appeal to clients seeking investments with steady income and low risk relative to stocks and longer-maturity debt instruments. However, investors should be mindful of the effects of changing interest rates on their performance.

Generally, money market funds can only invest in securities with maturities of 13 months or less, while the weighted-average maturity of the portfolio must be 60 days or less. The shorter duration of these securities means their prices are less sensitive to changes in interest rates than longer-maturing bond funds.

You’ve heard of the luck of the Irish. Want to bet on the luck of the asset manager?

Tidal Investments and Subversive Capital have filed a prospectus with the Securities and Exchange Commission for an “event contracts” exchange-traded fund tied to the outcomes of sports games. In other words, a sports gambling ETF. The Subversive All Season Sports ETF will have exposure to 40 to 80 bets at once, attempting to generate alpha by betting on where the adviser thinks the market’s odds are wrong. The filing also included a related fund, the Subversive Prediction ETF, tied to “economic, regulatory, climate and global events themes.” With the Securities and Exchange Commission still weighing approval of novel funds like these, whether they will actually make it to the market is a toss-up.

“They’re pretty much a pro-innovation SEC,” said Eric Balchunas, senior ETF analyst at Bloomberg Intelligence. Still, he theorized that the SEC wants to make sure it has a consistent framework in place to approve prediction market ETFs. “I think their issue here is that if they approve one of these, they could see 500 to 1,000 filings within a month or two. It would be raining filings.”

May the Odds Be Ever in Your Favor

Prediction market funds might be a way to generate some serious alpha, said Balchunas. With index funds priced so cheaply and information so readily accessible, it’s harder for active portfolio managers to beat the benchmark. “Places where there’s less analyst coverage, like sports and crypto, it’s possible you could have a portfolio manager rise out of that world who just killed it,” he said. “I don’t know if that’s something that would matter to regular investors, but I certainly think there’s a lot of dispersion and a lot of room for serious outperformance if somebody is really good at betting.”

Where’s the Fun in That? While the sports-gambling product is geared toward retail investors, Athanasios Psarofagis, an ETF analyst at Bloomberg Intelligence, questioned whether the market really wants an ETF wrapper for such bets. “Usually you go to the ETF because it makes it easier,” he said. “This doesn’t really solve that problem” since prediction market apps like Kalshi or Polymarket are already easy to access. Plus, where’s the joy in winning a bet that someone else made? “If I go to Vegas, I don’t want to give you my money to go play blackjack or roulette,” he said. “It feels like they’re outsourcing all the fun.”