Thematic exchange traded funds are gaining wider acceptance as investors take on more focused plays to weave in and out of the global markets.
Thematic funds have seen their share of the global investment market triple to 2.7% for all equity funds in the past decade, the Financial Times reports.
Global equity-based thematic funds now hold over $800 billion in assets under management, following a following “dramatic” growth spurt since the start of the Covid-19 pandemic, according to Morningstar data. In comparison, the thematic fund category only held $71 billion at the end of 2011, or 0.8% of all equity funds at the time.
The surge in demand for thematic funds even comes as recent research suggested U.S.-listed thematic ETFs often come to market at or near the top of a bull market for their relative themes. Consequently, many have on average underperformed the wider stock market on a risk-adjusted basis by about four percentage points per year for the first five years after launching.
“Some have delivered a phenomenal performance, others have been duds [but]most thematic funds don’t beat global equities over longer periods,” Kenneth Lamont, senior fund analyst for passive strategies at Morningstar, told the Financial Times.
According to Morningstar, “many thematic funds have chalked up impressive returns” since the beginning of the Covid-19 pandemic in March 2020, with over half of thematic funds outperforming the Morningstar Global Markets index for the three year period ended 2021.
However, the longer-term record “isn’t nearly as compelling,” Lamont warned, pointing out that only 39% of thematic funds outperformed the index over five years.
Additionally, the low track record has contributed to falling demand. In the past 15 years, over three-quarters of thematic funds have closed down, and only one in 10 have survived and outperformed.
Aniket Ullal, head of ETF data and analytics at CFRA Financial, argued that “previously a lot of fund selection was around performance: ‘let’s find the star fund manager who can beat the index’”.
Ullal sees a “big shift” in the way people approach thematic investments.
“Investing is now much more macro-driven,” he added. “That can mean being in certain sectors, factors, or themes. I personally don’t see an issue with thematic investing. In some ways, it’s a more holistic way of investing.”
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