Thematic assets concentrated in handful of ETFs, finds Morningstar

Nov 13th, 2018 | By | Category: Equities

The growth of assets under management in thematic ETFs listed in Europe has been driven by a handful of products, according to a report from investment research house Morningstar.

Thematic ETF AUM concentrated in a handful of products, finds Morningstar

Nearly three-quarters (73%) of total thematic ETF AUM in Europe is held in just five products.

The research found that thematic ETF assets have skyrocketed over the past three years, increasing almost sevenfold.

There are currently 31 thematic ETFs listed in Europe with €6.8 billion in AUM.

However, the report also showed that the five largest thematic ETFs account for 73% of total thematic ETF assets under management, and the top two funds – the iShares Automation & Robotics ETF and L&G ROBO Global Robotics and Automation ETF – account for almost half (48%).

The mortality rate of thematic ETFs is high: 35% of all thematic ETFs launched in Europe have already closed. Astonishingly, this figure more than doubles to 80% for all thematic ETFs launched prior to 2012.

While there has clearly been strong growth of thematic ETF AUM, Morningstar found that many investors are still unsure as to how the funds fit within a total portfolio perspective. To address this knowledge gap, the firm has published guidance for prospective investors.

When selecting a thematic ETF, Morningstar stresses the importance of understanding the specific risk/reward drivers of the strategy and potential similarities with cheaper ETFs. If the drivers are not distinct enough, investors should question the purpose of tracking the theme altogether.

By construction, thematic ETFs tend to invest in smaller stocks and consequently have consistently exhibited a higher volatility than their broad-market counterparts. Additionally, some strategies have shown persistent factor tilts. For example, technology-themed ETFs have favoured growth and momentum stocks.

As factors go in and out of favour, investors may observe long periods of underperformance relative to the broader market.

The firms also notes that, owing to their narrow exposure and related biases, most thematic ETFs are best used as satellite holdings.

Finally, turning to performance evaluation, the idiosyncratic nature of thematic funds means that evaluating their performance can be tricky. While thematic ETFs can be assessed against broad-market and/or sector indexes, Morningstar encourages the creation of more-targeted peer groups, where possible.

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