Thematic funds are less diversified, more volatile and overall riskier investments than your average open-end equity fund. They don’t behave as an asset class, and their fortunes diverge wildly as equity investors' favour rises and fades on trending topics.
In the past twelve months, funds investing in artificial intelligence-adjacent companies have outperformed, but investors would do well to remember the heyday of the autonomous driving and clean energy themes, both of which underperformed once rising interest rates pumped the brakes on many young, unprofitable companies in thematic funds’ portfolios.
One constant in a fund’s attractiveness is its fee — and fees are one of four pillars on which Morningstar’s Medalist Rating for funds is based. In the realm of thematic funds, which include both open-ended and exchange-traded funds, the latters' much lower fees put them at a distinct advantage. All six funds in our list offer fees in the lowest quintile of thematic-fund peers.
Should I Choose an Active or Passive Thematic Fund?
Along with each fund's Morningstar Medalist rating - all of which are Gold - we've included their star rating, a backward-looking metric reflecting each fund's risk-adjusted returns. On average, despite their drastically lower fees, exchange-traded thematic funds available for sale in Europe have outperformed their actively managed counterparts in the past 12 months.
While the average total return for open-ended funds tracking themes of Social, Technology, Physical World and Broad Thematic was 12.08%, exchange-traded peers returned 12.96%.
Passive thematics do harbour a drawback. Morningstar analyst Kenneth Lamont highlights passive funds' reliance on indexes that "by their nature, are more rigid and less adaptable to evolving themes." This rigidity can be disruptive, Lamont says, as demonstrated in 2021, when Blackrock's iShares Clean Energy ETF was forced to switch indexes amid the wall of assets flowing into the theme after Joe Biden's electoral victory.
The distinction between the two classes is about to become more complex. With Thursday's European launch of the ARK Innovation ETF, actively managed thematic ETFs have made the leap across the Atlantic. With a 0.75% management fee, it sits barely above Europe's index-based competitors but still well below actively-managed open-end funds.
The Best Rated ETFs - And What Analysts Say
L&G Artificial Intelligence ETF
• Medalist Rating: Gold
• Morningstar Rating: ★★★
• Trailing 12-Month Total Return: 28.49%
• Ongoing charge: 0.49%
"The strategy’s management team earns an Above Average People Pillar rating. The strategy's effective investment approach earns an Above Average Process Pillar rating. High liquidity exposure is attributed to stocks with a high trading volume, lending managers more flexibility. And a low quality exposure is rooted in stocks with higher financial leverage and lower profitability. The strategy's parent organization earns the firm an Above Average Parent Pillar rating."
Rize Cybersecurity Data Privacy ETF
• Medalist Rating: Gold
• Morningstar Rating: ★★★
• Trailing 12-Month Total Return: 22.12%
• Ongoing charge 0.45%
"The strategy's investment process inspires confidence and earns a High Process Pillar rating. Independent of the rating, analysis of the strategy's portfolio shows it has maintained a significant overweight position in liquidity exposure and an underweight in quality exposure compared with category peers. High liquidity exposure is attributed to stocks with a high trading volume, lending managers more flexibility. And a low quality exposure is rooted in stocks with higher financial leverage and lower profitability. The team managing the passive product drives the strategy's Above Average People Pillar rating. The strategy belongs to a strong firm that earns an Above Average Parent Pillar rating. The firm, for example, has had a competitive lineup success ratio and overall attractive fees."
Lyxor MSCI Millennials ESG Filtered (DR) UCITS ETF Acc
• Medalist Rating: Gold
• Morningstar Rating: ★★
• Trailing 12-Month Total Return: 5.49%
• Ongoing charge 0.45%
"The strategy's sensible investment philosophy merits an Above Average Process Pillar rating. Independent of the rating, analysis of the strategy's portfolio shows it has maintained a significant overweight position in liquidity exposure and volatility exposure compared with category peers. High liquidity exposure is attributed to stocks with a high trading volume, lending managers more flexibility. And high volatility exposure is rooted in stocks that have a higher standard deviation of returns. The strategy’s management team earns an Above Average People Pillar rating. The strategy's parent organization earns the firm an Average Parent Pillar rating."
iShares Electric Vehicles and Driving Technology UCITS ETF USD (Acc)
• Medalist Rating: Gold
• Morningstar Rating: ★★
• Trailing 12-Month Total Return: 3.46%
• Ongoing charge 0.40%
"The strategy’s management team earns an Above Average People Pillar rating. The strategy's effective investment approach earns an Above Average Process Pillar rating. High liquidity exposure is attributed to stocks with a high trading volume, lending managers more flexibility. And a low quality exposure is rooted in stocks with higher financial leverage and lower profitability. The strategy's parent organization earns the firm an Above Average Parent Pillar rating."
Rize Sustainable Future of Food UCITS ETF
• Medalist Rating:Gold
• Morningstar Rating: ★
• Trailing 12-Month Total Return: -12.20%
• Ongoing charge 0.45%
"The strategy's effective investment philosophy supports a High Process Pillar rating. Independent of the rating, analysis of the strategy's portfolio shows it has maintained a significant overweight position in liquidity exposure and an underweight in yield exposure compared with category peers. High liquidity exposure is attributed to stocks with a high trading volume, lending managers more flexibility. And a low yield exposure is rooted in holding fewer stocks with high dividend or buyback yields -- instead, typically holding stocks in an early stage of development. The team managing the passive product drives the strategy's Above Average People Pillar rating. The strategy has a solid parent that earns an Above Average Parent Pillar rating. This firm has had a competitive lineup success ratio and overall affordable fees."
L&G Clean Energy ETF
• Medalist Rating: Gold
• Morningstar Rating: ★★★
• Trailing 12-Month Total Return: -22.90%
• Ongoing charge: 0.49%
"The strategy’s management team earns an Above Average People Pillar rating. The strategy's sensible investment philosophy earns an Above Average Process Pillar rating. Independent of the rating, analysis of the strategy's portfolio shows it has maintained an underweight position in quality exposure and currently has an underweight in volatility exposure compared with category peers. Low quality exposure is attributed to stocks with higher financial leverage and lower profitability. And low volatility exposure is rooted in stocks that have a lower standard deviation of returns. The strategy's parent organization earns the firm an Above Average Parent Pillar rating."
