According to a new report from Morningstar, investors continue to show interest in thematic funds, a type of fund that invests in multiple sectors and assets based on a key theme such as AI, clean energy or cannabis.
Over the past five years, the volume of assets in thematic funds globally increased by approximately 108% to 562 billion dollars. However, the long-term performance record of these funds has been poor relative to their high fees.
As of mid-2024, US-based thematic fund assets represented 22% of the global figure, with 344 vehicles totaling $121 billion.
Morningstar estimates that as of June, index funds owned 70% of US-based thematic assetswith all but two index-based thematic strategies currently available in ETF wrappers—Calvert Global Water and Calvert Global Energy Solutions funds.
Most of these thematic ETFs focus on passive strategies, although actively managed thematic ETF strategies have now reached about 20% of the universe, up from 10% in 2014. (The figure was once even higher, reaching about a third of the thematic fund assets in 2021 due to the popularity of ARK Invest's ETFs, but it has declined in recent years).
The largest thematic ETFs in the US currently include Global X US Infrastructure Dev ETFwhich contains $7.4 billion in AUM; First Trust NASDAQ Cybersecurity ETF, with $6.6 billion in AUM; AND ARK Innovation ETFholding $6 billion in AUM.
However, Morningstar researchers noted that in the first half of 2024, thematic fund closures outnumbered new launches for the first time since 2008.
“Historically, thematic fund launches have been pro-cyclical,” the researchers wrote. “New strategies are often introduced during periods of strong market performance, such as the new millennium and mid-2000s, but dry up during downturns. … This pattern is reflected by foreclosures that tend to increase in market declines.”
Morningstar rates US thematic funds as both passive and active carry higher management fees than their non-thematic counterparts. The average for passive thematic funds is 0.6%, compared to close to 0.5% for non-thematic ones. Actively managed thematic funds have average management fees of close to 1.1%, compared to just over 1.0% for non-thematic ones.
On an asset-weighted basis, both passive and active thematic funds charge average fees of over 0.6% compared to fees of approximately 0.35% for non-thematic funds.
However, over a three-year period ending in June 2024, only 9% of US thematic funds outperformed global equities. Over longer time periods, success rates for thematic funds range between 15% and 18%, Morningstar found.
“Over longer periods, these funds' high fees contribute to their relative underperformance against broad market indexes,” the researchers wrote. “High closure rates also contribute to poor ratios, with 51% of funds failing to survive the 15-year period by mid-2024.”