The Problem With Thematic Tech Investing

An investment trend that is gaining tremendous popularity is thematic tech investing: many investors are attracted to funds that own clean energy, cybersecurity, electric vehicles, e-sports, robotics, 3D printing and more.

What’s The Caveat?

The majority of these funds fail to outperform the market, Amy Arnott, CFA and portfolio strategist for Morningstar said in an April 12 post.

Thematic funds come with high fees, high failure rates and lack diversification, Arnott said.

The potential risk of too much concentration in thematic funds can cause stocks to drastically drop if investors choose to suddenly flee the funds, the strategist said. 

While thematic tech investing performed well in 2020, the strategy lacks strong performance over a long time horizon, CNBC said in a story on Morningstar's analysis.

The investments have track record of doing poorly over longer periods, according to Morningstar's annual Thematic Funds Landscape Report.

About 30% of U.S.-based funds that were launched in the past three decades are no longer around. Moreover, thematic funds have "trailed the overall equity market by about 4 percentage points per year over the trailing 10-year period," Arnott said. 

Morningstar On Thematic Tech Failure Rates, Fund Fees

By nature, thematic tech inveesting chases the latest theme like EV or clean energy.

Like most trends, these themes go in and out of popularity, causing them to have high failure rates. Nearly one-third of all thematic funds have closed in the last 10 years and 34% underperformed the broader equity market, according to CNBC. 

Along with high failure rates, thematic tech investing typically comes with lofty fees.

“High fees charged by thematic funds have contributed to their relatively poor performance versus broad market indexes over longer periods,” said Morningstar's Arnott. 

Building on this negative connotation, the concentrated ownership of these funds means that “the liquidity promised by the ETF structure means investments can be pulled out on a whim,” according to Morningstar. 

“Because of their narrower exposure and higher risk profile, thematic funds are best used to complement rather than replace existing core holdings,” said Kenneth Lamont, a senior research analyst at the firm.