Investors are often drawn to the allure of hot-performing funds, hoping to reap impressive returns. However, a recent study conducted by Morningstar reveals that this pursuit can lead to disappointing results, especially when it comes to thematic funds.
Thematic funds refer to mutual funds and exchange-traded funds (ETFs) that focus on specific investment strategies, such as artificial intelligence or energy transition. Morningstar examined thematic funds domiciled in the U.S., U.K., Ireland, and Luxembourg over the five-year period ending on June 30.
Surprisingly, while these funds delivered an average annual return of 7.3%, investors only managed to achieve a time-weighted return of 2.4%. In contrast, non-thematic funds showcased a much narrower performance gap, with total returns of 8.6% matching investors’ returns of 8%.
The discrepancy in performance is even more pronounced when it comes to ETFs. Morningstar’s study highlights that ETFs, favored for their tactical betting potential and ability to attract substantial investments, present a greater performance gap compared to other types of funds. The concentration of ETFs contributes to higher levels of volatility.
Specifically, the performance gaps in energy transition and future mobility (including the popular ARK Innovation ETF ARKK) stood at 11.9% and 10.7% respectively.
It’s evident that relying solely on chasing hot-performing thematic funds can lead investors astray, resulting in subpar returns. Being mindful of this performance gap is crucial when making investment decisions to avoid missing out on more favorable opportunities.
By maintaining a clear understanding of thematic fund performance and considering a broader perspective, investors can make more informed choices and increase their chances of achieving stronger financial outcomes.
