Thematic funds, the mistakes to avoid

In recent years, thematic funds have attracted a growing number of investors, with assets under management more than doubling since 2018, according to data from Morningstar.
However, the poor timing of the trades significantly reduced investors' returns, reducing them by almost two-thirds.
Despite an average annual return of 7.3% in thematic funds over the past five years (through June 2023), investors achieved a modest 2.4% return.
By comparison, the S&P 500 has averaged an annual return of 14% over the same period.
This significant gap raises questions about the strategies of investors in thematic funds.
Morningstar analysts attribute the disparity in earnings to poor market timing by investors.
In particular, in the most volatile funds, frequent trading has led investors to buy at high levels and sell at lows, thus compromising overall returns.
Analysts recommend a more patient approach to achieve better investment results.
The more specific the fund's theme, the greater the gap in returns.
For example, investors focusing on technology funds saw a 5.5% gap in returns, compared to 1.1% for less sector-specific thematic funds.
This highlights the importance of understanding the specific nature of thematic funds before investing.
Morningstar's report highlights that investors have lost more value in thematic exchange-traded funds (ETFs) than mutual funds, due to tactical bets and higher volatility resulting from investment concentration.
This raises questions about risk management and diversification of investment strategies.
While funds typically report total returns, Morningstar points out that investor returns can be a better indicator, as they include the impact of money inflows and outflows.
Understanding how these flows influence overall returns is essential to fully evaluate the performance of a thematic fund.
It is therefore necessary to adopt more prudent strategies in thematic funds, avoiding the temptation to trade too frequently and instead embracing a long-term approach.
Awareness of theme specificity and careful management of ETFs are crucial to maximizing returns in this rapidly growing sector.
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