The Four Elements Thematic ETF Portfolio
Last Updated:
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 (PAVE) and the Global X Defense Tech ETF (SHLD). These funds focus on long-term themes with real tailwinds behind them.
Then there are the not-so-great ones. I won’t name names, but you know the type: niche focus, sky-high expense ratios, launched just as the hype cycle peaked—classic recipes for disappointment.
On top of that, there are thematic multi-funds, like the SPDR S&P Kensho New Economies Composite ETF (KOMP), which roll several trends into one. And that got me thinking: what if I made my own concoction?
Presenting the “Four Elements” portfolio, inspired by the ancient pseudoscience that boiled the universe down to fire, water, air, and earth—before we had things like the periodic table. Keep reading to find out how this silliness works and, more importantly, how it fared against the S&P 500.
The fire component
Nobody has securitized fire... yet. You could interpret this as oil, but let’s be honest, oil isn’t always on fire. Instead, I’m looking at the big ball of plasma in the sky—our sun. For this component, I’m allocating 25% to the aptly named Invesco Solar ETF (TAN).
TAN has a 0.67% expense ratio and tracks the MAC Global Solar Energy Index. It’s heavily focused on mid-cap and small-cap growth stocks, with notable international exposure.
Top holdings include First Solar Inc (FSLR), a leading manufacturer of solar panels (10.53%), Enphase Energy Inc (ENPH), which specializes in solar microinverters and energy management (8.10%), and NEXTracker Inc (NXT), a solar tracker solutions provider (8.07%).
The water component
Turns out you can invest in water via Nasdaq Veles California Water Index futures—or you could just hoard bottles of Evian. Either way, I prefer the Invesco Water Resources ETF (PHO).
PHO tracks the NASDAQ OMX US Water Index and has performed impressively so far, earning a five-star Morningstar rating with better risk-adjusted returns than most funds in the “Natural Resources” category. With a 0.59% expense ratio, PHO tilts toward mid- and small-cap blend stocks, with a slight emphasis on growth.
Top holdings include Ecolab Inc (ECL), which provides water treatment solutions (7.95%), Roper Technologies Inc (ROP), an industrial tech company with water-focused applications (7.89%), Ferguson Enterprises Inc (FERG), a leading distributor of plumbing and waterworks supplies (7.34%), Veralto Corp (VLTO), specializing in water quality solutions (6.08%), and Xylem Inc/NY (XYL), a water technology company (6.08%).
The air component
Some residents of polluted cities in China buy bottled oxygen to breathe—thankfully, things aren’t that dystopian here. For air exposure, I’m going with the aptly named First Trust Global Wind Energy ETF (FAN), which adds even more renewables focus to this portfolio.
FAN tracks the ISE Clean Edge Global Wind Energy Index, holding both pure-play wind energy companies (60% allocation) and diversified companies with wind-related revenue or assets (40%). Single stock exposure is capped to keep things balanced: no pure-play company exceeds 8%, and no diversified company exceeds 2%.
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 (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.
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 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.
