5 Top Thematic ETFs - and the 5 Worst

An impressive 70% of thematic ETFs have outperformed global equities over the past year, but not all funds have been so strong. We look at the best and worst thematic ETFs

Kenneth Lamont 18 May, 2021 | 9:40AM
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Some of the biggest winners in the wake Covid-19 market turmoil have been thematic funds. As individuals and businesses across the world have quickly adapted to a new way of life, new trends have emerged while others have accelerated.

An impressive 70% of thematic exchange traded funds (ETFs) in Europe outperformed global equities (as proxied by the Morningstar Global Markets Index) in the year to mid-May 2021. The best performers posted triple digit returns over this period. So where are the winners and losers?

Blockchain Buzz

The best performing thematic ETF in Europe was the Invesco Elwood Global Blockchain ETF, which benefitted from the global stampede into crypto currencies and returned an eyebrow- raising 113% over the trailing year. Amongst the funds largest holdings are pureplay crypto names such as Bitfarms, HIVE and Coinbase, the latter being the biggest cryptocurrency platform in the US which IPO’d to much fanfare earlier this year.

Interestingly, the rival First Trust Indxx Innovative Transaction & Process ETF also claims to track companies poised to benefit from the adoption of blockchain technologies, but returned just 42% over the same time span. At the time of writing, its largest holdings were tech giants Oracle and IBM, both of which have many business lines unrelated to blockchains technologies. This reinforces the need to investors too look beyond the fund name when evaluating a thematic strategy.

Biden’s Boost

Elsewhere, the election of US President Biden and his subsequent pledge to invest in renewable sources of energy proved a shot in the arm for a number of themes.

Amongst the best performers of the year were those directly tracking the Energy Transition like the iShares Global Clean Energy ETF, but also those tracking other connected themes such as Battery Technology and Future Mobility.

L&G Battery Value Chain ETF, WisdomTree Battery Solutions ETF and Lyxor MSCI Future Mobility ESG Filtered (DR) ETF all won big as the anticipated demand for electric cars and energy storage also rose.

5 best performing thematic ETFs europe

Life Sciences Lag

Those funds tracking Healthcare and Pharma themes fared less well. For example, the L&G Pharma Breakthrough ETF broke even over the trailing year while Global equities retuned 34%. Fund returns were dented when portfolio holding Mallinckrodt, filed for bankruptcy amidst a storm of lawsuits relating to the sale of opioid-based products. The fund as also impacted when holding Sapepta Therapeutics lost half its value on publication of unfavorable results in a clinical trail.

Both these instances highlight potential drawbacks of tracking a narrow theme passively. The strategy has no way to quickly react to bad news and (as in the case of Mallinckrodt) will hold the stock until the next rebalance. The small number of fund holdings also means that overall returns can be influenced by the performance of handful of stocks.

Diversification Benefits

While most thematic ETFs have prospered in the current crisis and others have not, they have all demonstrated different risk and return drivers from both the wider market and each other.

This allows them to be deployed tactically to make bets on short term trends. However, investors have repeatedly shown themselves to be poor market timers, leading to poor investment outcomes.

We think these funds are best deployed as long-term holdings within a broader portfolio. Not only might they profit from long-term structural trends, but their distinct risk and return characteristics may bring welcome diversification benefits within your portfolio.

worst performing thematic ETFs europe

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Global Thematic Funds Landscape

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Kenneth Lamont  is a passive funds research analyst for Morningstar Europe.