Nick Maunder, investment analyst at Canaccord Genuity Wealth Management, has said the world of thematic ETFs is becoming harder to navigate due to the ballooning number of strategies and the large dispersions in performance.
For example, clean energy is one of the most heavily populated themes with 20 ETFs, according to Bloomberg Intelligence. However, the performance of the ETFs year to date varies from -1.7% for the Global X Renewable Energy Producers UCITS ETF (RNRU) to -20.6% for the iClima Distributed Renewable Energy UCITS ETF (DEGP), according to justETF.
The number of thematic ETFs has grown from 36 in 2018 to 124 at the end of April 2022 although there are signs the market is starting to slow.
The product class saw inflows of just €600m in Q1, down from €2.1bn in the previous quarter, according to data from Morningstar.
It is the first time since Q4 2019 that thematic ETFs have failed to gather flows of more than €1bn and the first time since peak COVID-19 volatility where assets in the product class fell.
“The ever-expanding universe of thematic ETFs does bring its challenges," Maunder (pictured) said. "There is rarely a consensus view on a theme so ETFs have vastly different holdings. This means dispersion in returns can be large.”
He added the wealth manager currently invests in three themes comprising of robotics and artificialintelligence, cybersecurity and batteries, all of which have eight, nine and six ETFs in their universe, respectively.
When it comes to navigating the ever-growing market, Maunder said it conducts thorough research of the space with a focus on three key areas.
“When we research a theme, we consider both ETFs and active managers and consider theme purity, diversification and liquidity for the ETFs. We need to look beyond the index methodology and dive deeper into the holdings to determine alignment with our views of the theme,” he said.
Furthermore, Maunder said the current market environment means investors are much more conscious of company valuations meaning the often growth or momentum-orientated strategies have fallen out of favour.
The tech-heavy Nasdaq recorded its worst-ever monthly performance since 2008 in April, falling 13.3% while the S&P 500 ended 8.7% over the same period.
The Bank of America said recently the rising risk of recession meant growth stocks were being hit particularly hard, adding while the risk was low it was being priced in for 2023.
“For a long time, it seemed the market cared little for valuations and now this has changed,” he concluded.
This article first appeared in Thematics Unlocked: Signs of a maturing ETF market, an ETF Stream report. To access the full issue,click here.