Investing in themed funds: investing smart is different

Last update: 17.09.2024 08:31

Investing in theme funds – a new opportunity for your money? Theme funds invest in companies that are supposedly active in up-and-coming sectors. Sounds tempting, doesn’t it? But before you jump in, let’s take a closer look.

Theme funds are equity funds that invest specifically in companies in a particular theme or sector. These themes range from technology and renewable energies to generational trends and demographic changes. The idea behind thematic funds is to profit from trends and developments by investing in companies that are active in precisely these areas.

Thematic funds are attractive to investors because they are relatively easy to understand. The investment themes use strong narratives that investors are familiar with, such as the ageing population, the transition to a digital economy or the triumph of electric vehicles. This makes them easy to understand and has a strong appeal to investors’ emotions. “We can usually make an emotional connection with a story. Emotions solidify memories and add weight to an experience. So if something is emotionally charged, we are more likely to remember it and attach more importance to it,” says Sarah Newcomb, Senior Behavioral Scientist at Morningstar.

The launch of thematic funds is closely linked to trends, so the themes of new funds are no coincidence. Since 2023, the focus has been on AI topics, while lockdown 2020 was dominated by topics such as remote working, online entertainment and e-commerce.

When you buy a themed fund, you are basically making three bets. You are betting that your theme will grow as expected. You are betting that the companies in the fund are positioned to benefit from the growth of the theme. And you are certain that the market growth will pay off in the form of attractive share returns. The probability of winning these bets is low. Studies by Morningstar show that the older a fund gets, the more likely it is to close. And the surviving funds are less likely to outperform the global market.

A recent study by VZ Vermögenszentrum on theme funds confirms the results already known:

• Short survival time: Many theme funds fail after a short time. More than 50 % disappear from the market within 10 years. This shows that these investments are often not successful in the long term.
• High fees: Thematic funds are quite expensive. On average, active funds have a total expense ratio of a whopping 1.84%. This significantly reduces your return.
• Poor return: Here comes the point that hurts the most – the return. Most theme funds underperform the global equity market (MSCI World). In the last three years, 97% of all funds have achieved a lower return.
• High risks: Theme funds often focus on specific themes and invest in only a few companies (usually 30-50). This can lead to strong price fluctuations and higher risks.

• The Scope Study 2023 shows that multi-thematic funds performed 4.8 percentage points worse than the average of all equity funds in 2022. Compared to the MSCI World Index, the difference was as much as 9.7 percentage points. Only three out of 132 thematic funds had a positive return in 2022.
• The Morningstar Study 2022 shows that thematic funds have significantly underperformed the broad equity market in recent years. Only a fraction of funds outperformed the benchmark. Morningstar warns against the timing of investments in thematic funds, as many investors often only invest when the best performance is already over.

One reason why thematic funds perform so poorly is the lack of diversification in the investment universe. Nobody knows with any confidence today which stocks will be the stars of tomorrow.

Overall, studies by renowned institutes such as the Scope Group and Morningstar show that thematic funds often perform worse than other investment alternatives. This is due to the high fees, lower returns and risks associated with focusing on specific themes. So before you put your hard-earned money into themed funds, think carefully about whether they are right for you. Their short lifespan, high costs, poor returns and risks should not be underestimated. You may be better off looking at other investment strategies that are more stable and profitable in the long term. Your money, your choice – but be aware of the risks before you jump.