Morningstar - Q4 2021 - 33
available to Australian investors were launched
over the past year. While the market makes
up only a small part of the Australian ETF industry-
just more than $1.9 billion of the $110 billion
total ETF market-several thematic ETFs have
grown significantly.
In a recent report on thematic funds, Morningstar
analysts Kongkon Gogoi and Zunjar Sanzgiri
attribute the growth to the pandemic, which they
say, " evoked investors' sentiment toward
disruptive trends and sustainable investing across
the world. "
But Gogoi and Sanzgiri urge caution. If chosen
carefully, thematic ETFs have the " potential to
complement an existing diverse portfolio with added
alpha, " they say. However, the risks are notable.
First, setting performance expectations is hard.
" Many strategies with more esoteric themes have
short track records, and distinguishing whether
the underlying theme is really a transformational
trend or simply the latest fad takes time, "
they say. " In the interim, factors like regulatory
scrutiny, further technical advances, or a
shift in investors' collective psyche may result
in an abrupt boom or bust of a particular
theme. In either scenario, however, forming a
forward-looking view on absolute or relative
performance can be precarious. "
Second, the two analysts say that investors are
likely to experience a rough ride due to
higher volatility. Thematic funds are typically
concentrated in their respective sectors of interest
and often rely on fewer stocks than typical
diversified offerings.
Third, they note that thematic ETFs are expensive.
The fees across the current cohort of Australian
thematic ETFs range from 57 basis points
to 95 basis points, which is substantially higher
than fees on more diversified peers. Trading
thematic funds can also be costly, with
substantially high bid-ask spreads compared with
broad-based ETFs.
Finally, Gogoi and Sanzgiri say thematic strategies
can also fall victim to capacity constraints.
" Theme-based investing frequently targets niche
01/2021
Source: Morningstar Direct.
03/2021
05/2021
07/2021
09/2021
segments of the investment universe, which is often
less liquid and less appealing from a valuation
perspective, " they say. " Too much money chasing
too few ideas can stretch valuations and is
not a recipe for successful long-term investing. "
The extra risk posed by thematic ETFs raises a
question: Have investors been adequately
compensated for taking on these risks?
While the Australian thematic ETF market is
in its early stages, Gogoi and Sanzgiri note that the
sector exhibits middling or, in some cases,
worse risk-adjusted performance compared with
passive ETFs like Vanguard Australian Shares.
Vanguard Growth Index
The index fund's half-life, by contrast, is
five years, nine months, meaning Growth
Fund of America's rate of portfolio change
is about twice that of the passive fund.
TRENDS
Value Retakes the Lead After September
50
The large-value and large-growth Morningstar
Categories have been in stiff competition this
year. Large-value funds bested their large-growth
counterparts in the first quarter, but largegrowth
funds dominated in the summer rally.
Then, large-value stocks held up better in the
September slump. Through September, the
average large-value fund was up 16.3%, compared
with 12.4% for the typical large-growth fund.
12/31/2009
Style had the largest influence on returns for
the year to date: Among the nine U.S. style box
Growth of $10K
Large Value
The " half-life " of a fund is the point when its
rate of portfolio change drops below 50%.
12/31/2003
12/31/2015
Morningstar Categories, value took three of the
top four spots. The impact of market cap varied.
The biggest winner for the year so far was
the small-value category, up 24.2%. Small-growth
funds were at the other extreme, averaging
a 9.6% return.
06/30/2021
If the trend continues through December,
value stocks would end a calendar year ahead
for the first time since 2016.
Benjamin Slupecki is a data journalist at Morningstar.
A look at the longer-term performance of global
thematic funds does not bode well for their
Australian counterparts. Gogoi and Sanzgiri found
that over the trailing 15 years through March 2021,
more than half of thematic funds globally
have shuttered. Only 22% survived and outperformed
the Morningstar Global Markets Index.
Growth Fund of America
The half-life of Growth Fund of America's
June 2021 portfolio occurred in June
2018, meaning its half-life is three years.
" These figures paint a bleak picture for
investors, " they note, " and suggest that the odds
of picking a thematic fund that survives and
outperforms global equities over longer periods
are stacked against them. "
Overlap
100%
Emma Rapaport is editorial manager at Morningstar Australia.
75
50
Large Growth
Small Value
Small Growth
$13K
12.43
11.63
10.93
11.27
10
11
12
9
33
https://www.morningstar.com.au/
https://www.morningstar.com/authors/2449/benjamin-slupecki
Morningstar - Q4 2021
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