Thematic ETFs saw record inflows of €9.5 billion last year, as totale assets in the category almost tripled to €22.7 billion, according to Morningstar’s European Thematic Roundup 2020.
One third (EUR 3.1bn) of all thematic ETF net inflows were poured into Energy Transition themed funds over the course of the year, with connectivity-themed ETFs, a grouping that includes cybersecurity and cloud computing themes, also proving popular with €2.5 billion in inflows.
‘The disruptive volatility experienced in the oil markets led many to seek alternatives and to reevaluate the associated risk and return of alternative energy sources,’ said Kenneth Lamont, Senior Analyst, Manager Research, Passive Strategies. ‘The favourable US election result and other pro-environmental political developments globally were also supportive.”
Strong outperformance
Themed ETFs registered a stellar performance across the board in 2020. ‘Thirty-three of the 36 Europe-listed thematic ETFs outperformed the MSCI World Index, and most by a handsome margin,’ he said. For example, the iShares Global Clean Energy ETF recorded a 120% return, while the WisdomTree Cloud Computing ETF ended the year 92% up. ‘Even the worst thematic performers managed positive returns. These include the iShares Ageing Population ETF, which, despite being hit hardest during initial stages of the pandemic, rebounded to return 3% for the year, thanks largely to its outsize exposure to healthcare stocks.’
However, such incredible returns come with a risk. ‘For example, the L&G ROBO Global Robotic and Automation ETF lost 16% in 2018 before gaining 32% the following year. It is important to understand the risk and return characteristics of your ETF before including them in your portfolio,’ Lamont warned. ‘Investors should be wary and look beyond dazzling short-term returns when selecting thematic ETFs. Our own research has shown that thematic funds globally have struggled to survive and outperform global equity benchmarks over longer periods of time.’
The hype around thematic ETFs was confirmed by the record number of 17 ETFs that were launched in Europe last year. Morningstar specifically notes the arrival of US-based ETF-specialist Global X. ‘Initial European launches cover video games and eSports and telemedicine and digital health, with more expected to follow.’