What are we looking for?
Top- and bottom-performing thematic investments, highlighting risks and opportunities
The screen
Last November, I wrote a column about thematic ETFs. Recall that these types of investment funds often tout exposure across traditional economic sectors with the goal of exploiting a long-term trend. Big data, robotics and automation, e-sports, wearable tech and, yes, even cannabis are considered investment themes. Morningstar’s study on thematic investments points to the fact that over the past 15 years, the minority of thematic investments ended up surviving. Of those that did, less than half outperformed a plain vanilla global equity benchmark.
These figures echo what we’ve seen here in Canada. Since 2019, 33 thematic funds have either been liquidated or merged into other funds. Admittedly six of these funds were tied to the Emerge ARK saga, which had more to do with fund administration and stewardship issues than fund performance. Excluding those, the funds that closed after 2019 were, on average, on the market for just over three years (1,141 calendar days). Today, there are roughly 64 Canadian-domiciled thematic mutual funds and ETFs available for sale in Canada. Unexpected liquidation has the potential to trigger a taxable event, which may be consequential for the investor if held outside a tax shelter.
That being said, thematic investments do offer the potential for outsized gains and arguably may have a place as a satellite or small portion of asset allocation. Today, we exemplify the top and bottom performers in this space to highlight just how varied returns have been. To find these funds, I used Morningstar Direct to screen for Canadian-domiciled mutual funds and ETFs that Morningstar has placed in our thematic fund taxonomy. The taxonomy is based on intentionality, which is determined by analyzing a combination of fund legal name, investment policy, investment strategy and information gleaned from publicly available data sources such as prospectuses, marketing materials and index methodologies. Only the oldest share class of each fund was included in this analysis.
What we found
The top and bottom 10 performers within the Canadian-domiciled thematic investment fund and ETF space are listed in the table accompanying this article. Though most of the thematic fund universe analyzed today has at least a one-year track, I am of the belief that this is far too short a period to judge any investment’s merit. On the other hand, only 20 of the surviving funds have more than a five-year track record. As a compromise, I’ve used the three-year trailing returns as the basis of today’s ranking, which encapsulates 32 of the 64 available thematic funds. Alongside trailing returns, I’ve also displayed MERs, categories, themes and Morningstar’s ratings, if available.
This article does not constitute financial advice; it is always recommended to conduct one’s own independent research before buying or selling any of the funds mentioned in this article.
Ian Tam, CFA, is director of investment research for Morningstar Canada.
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