Thematic funds are less diversified, more volatile and overall riskier investments than the average open-end equity fund. They don’t behave like a single asset class, and their fortunes diverge wildly as equity investor favor rises and falls on trending themes.
Over the past twelve months, funds investing in AI-related companies have outperformed, but investors would do well to remember the heyday of themes such as autonomous driving and clean energy, both of which underperformed once rising interest rates have held back many young, unprofitable companies in thematic fund portfolios.
One constant in a fund’s attractiveness is its fee, and fees are one of the four pillars on which Morningstar’s Medalist Rating for funds is based. In the realm of thematic funds, which include both open-end funds and exchange-traded funds, the latter’s much lower fees put them at a distinct advantage. All six funds on our list offer commissions in the lowest quintile of their category.
Is it better to choose an active or passive thematic fund?
In addition to each fund’s Morningstar Medalist rating – all Gold – we have included their star rating, a retrospective metric that reflects each strategy’s risk-adjusted returns. On average, despite drastically lower fees, thematic exchange-traded funds (ETFs) available for sale in Europe have outperformed their actively managed counterparts over the past 12 months.
While the average total return of open-end funds that follow Social, Technology, Physical World and Thematics in general was 12.08%, ETFs recorded a return of 12.96%.
However, passive thematic funds have a drawback. Kenneth Lamont, an analyst at Morningstar, highlights the dependence of passive funds on indexes which “by their nature are more rigid and less adaptable to evolving themes”. According to Lamont, this rigidity can be disruptive, as was demonstrated in 2021, when Blackrock’s iShares Clean Energy ETF was forced to change its index due to large flows pouring into the theme following Joe Biden’s election victory.
The distinction between the two types is about to become more complex. With the recent European launch of the ARK Innovation ETF, actively managed thematic ETFs have made the leap overseas. With a management fee of 0.75%, the ETF ranks just above its European index-based peers, but still well below actively managed open-end funds.
The ETFs with the best ratings and analyst opinions
L&G Artificial Intelligence ETF
- Medalist Rating: Gold
- Star Rating: ★★★
- 12 month performance: 28.49%
- Ongoing charges: 0.49%
“The strategy’s management team scores above average for the People pillar. The strategy’s effective investment approach scores above average for the Process pillar. High liquidity exposure is attributed to stocks with a high trading volume, which allows managers greater flexibility. Low quality exposure is instead linked to stocks with higher leverage and lower profitability.
Rize Cybersecurity Data Privacy ETF
- Medalist Rating: Gold
- Star Rating: ★★★
- 12 month performance: 22.12%
- Ongoing charges: 0.45%.
“The strategy’s investment process inspires confidence and has earned a High Process Pillar rating. Regardless of the rating, portfolio analysis of the strategy shows that it has maintained a significantly overweight position in liquidity exposure and underweight in liquidity exposure. to quality compared to peers. The high exposure to liquidity is attributed to securities with a high trading volume, which allows managers greater flexibility. The low exposure to quality is instead linked to securities with greater financial leverage and lower profitability. The People pillar rating is above average. Strategy belongs to a solid company that achieves an above average company pillar rating.”
Lyxor MSCI Millennials ESG Filtered (DR) UCITS ETF Acc
- Medalist Rating: Gold
- Star Rating: ★★
- 12 month performance: 5.49%
- Ongoing charges: 0.45%.
“The strategy’s investment philosophy merits an above-average process pillar rating. Regardless of the rating, analysis of the strategy’s portfolio shows that it has maintained a significantly overweight position in liquidity and volatility relative to its category peers. High exposure to liquidity is attributed to stocks with a high trading volume, which allows for greater flexibility. High exposure to volatility is instead attributable to stocks that have a higher standard deviation of returns rating of the People pillar above average. rating of the Parent Pillar is average”.
iShares Electric Vehicles and Driving Technology UCITS ETF USD (Acc)
- Medalist Rating: Gold
- Star Rating: ★★
- 12 month performance: 3.46%
- Ongoing charges: 0.40%
“The strategy’s management team earns an above-average People pillar rating. The strategy’s effective investment approach earns an above-average Process pillar rating. High liquidity exposure is attributed to stocks with high trading volume, which allows managers greater flexibility. Exposure to the low quality factor is instead linked to securities with higher leverage and lower profitability.
Rize Sustainable Future of Food UCITS ETF
- Medalist Rating: Gold
- Star Rating: ★
- 12 month performance: -12.20%
- Ongoing charges: 0.45%.
“The strategy’s effective investment philosophy supports the High Process Pillar rating. Regardless of the rating, portfolio analysis of the strategy shows that it has maintained a significantly overweight position in liquidity and underweight yield exposure relative to peers of the category. The high exposure to liquidity is attributed to stocks with high trading volume, which allows greater flexibility. The low exposure to the yield factor is due to holding fewer stocks with high dividend or yields share buyback. The team has an Above Average rating, while the company has an above average rating”.
L&G Clean Energy ETF
- Medalist Rating: Gold
- Star Rating: ★★★
- 12 month performance: -22.90%
- Ongoing charges: 0.49%
“The strategy’s management team scores above average in the People pillar. The investment philosophy scores above average in the Process pillar. Analysis of the strategy’s portfolio shows that it has maintained an underweight position in the factor quality and currently underweight volatility compared to peers in the category. Low exposure to quality is attributed to stocks with higher leverage and lower profitability is linked to stocks that have a lower standard deviation of returns The corporate pillar rating is above average.”
For Morningstar’s fund analysis methodology, click here.
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Tags: Gold Medal Thematic ETFs
