Investors continue to show interest in thematic funds, a type of fund that invests across multiple sectors and assets based on an overriding theme such as AI, clean energy or cannabis, according to a new report from Morningstar.
Over the past five years, the volume of assets in thematic funds globally rose by roughly 108% to $562 billion. However, these funds’ long-term performance record has been spotty relative to their high fees.
As of mid-year 2024, U.S.-based thematic fund assets represented 22% of the global figure, with 344 vehicles totaling $121 billion.
Morningstar estimates that as of June, index funds held 70% of U.S.-based thematic assets, with all but two index-based thematic strategies currently available in ETF wrappers—the 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 used to be even higher, reaching about one-third of thematic fund assets in 2021 due to the popularity of ARK Invest ETFs, but it dropped in recent years).
The largest thematic ETFs in the U.S. currently include Global X US Infrastructure Dev ETF, which contains $7.4 billion in AUM; First Trust NASDAQ Cybersecurity ETF, with $6.6 billion in AUM; and ARK Innovation ETF, holding $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,” researchers wrote. “New strategies are often introduced in periods of strong market performance, like the new millennium and the mid-2000s, but dry up during downturns. … This pattern is mirrored by closures which tend to spike in market downturns.”
Morningstar estimates that both passive and active U.S. thematic funds carry higher management fees than their non-thematic counterparts. The average for passive thematic funds is 0.6%, compared to closer to 0.5% for non-thematic ones. Actively managed thematic funds feature 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 U.S. 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 relatively poor performance versus 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 to mid-2024.”
