What are we looking for?
The best and worst of thematic funds
The screen
The allure of investing in a specific theme like Big Data, autonomous technology, space exploration or artificial intelligence has captivated the financial landscape, as investors increasingly seek opportunities aligned with what they see as future trends. Consequently, fund manufacturers have adeptly responded to this demand, crafting a myriad of investment products tailored to these themes. Morningstar has identified 77 of such thematic funds from Canadian-domiciled fund companies, of which 52 were launched after 2020, highlighting the acceleration of the trend.
However, for every investor that has found success in thematic investing, there are many more that have not fared quite as well. In a global Morningstar study of thematic funds, it was found that over the past 15 years, more than three-fourths of thematic funds globally have shuttered and just one in 10 survived and outperformed.
Simply put, an investor is making three distinct wagers when investing thematically: (1) that they’ve picked the right theme, (2) that they’ve picked the right manager or index that captures the theme and (3) that the theme is not already overvalued. For the few that have succeeded, returns can be extraordinary. With this in mind, this week I thought to illustrate the dramatic divergence in thematic fund performance by showing the top and bottom performers within this space in Canada with the overarching message that investors may want to proceed with caution while investing thematically.
What we found
Based on one-year trailing returns, the top and bottom performers within the Canadian-domiciled universe of thematic funds are displayed in the table accompanying this article, alongside MERs, inception dates and the thematic category and subcategory to which each fund belongs, according to Morningstar’s identification framework.
This article does not constitute financial advice, it is always recommended to conduct one’s own independent research before buying or selling any of the ETFs mentioned in this article.
Ian Tam, CFA, is director of investment research for Morningstar Canada.
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Ian Tam, CFA