In a broad risk-off environment, global thematic exchange traded funds suffered heavy outflows as investors trimmed exposure to niche plays that mostly captured high-growth themes.
Thematic fund strategies targeting high-growth plays and new trends previously attracted robust inflows in the past few years as investors shifted their attention to the post-COVID recovery. However, these same themes that led the post-pandemic rally were also among the worst hit during the selling in 2022, as elevated inflationary pressures and aggressive interest rate hikes dampened the outlook on the growth style.
According to Morningstar data, thematic funds suffered a record $6.3 billion in outflows over the first six months of 2022, Reuters reported. In comparison, the thematic segment attracted $142.9 billion in net inflows over the same period last year.
Additionally, throughout the broad market sell-off, thematic fund assets declined to $616.9 billion as of the end of June, falling off 24% year-over-year.
With all the pressure the thematic segment has faced this year, fund providers have curtailed new thematic launches to just 65 new offerings in the first half of 2022, compared to a record 234 for the same period in 2021.
“Thematic funds are known to be among the riskiest categories of mutual funds, in part because it restricts the opportunities available. It prohibits the fund from investing in stocks that are not related to the theme,” Richard Gardner, chief executive officer at financial services firm Modulus Global, told Reuters. “In a bear market, investors tend to be incredibly risk averse. So, it is only natural that thematic funds would see lessened interest.”
Some market observers have warned that investors may be chasing after thematic fund strategies like a flavor-of-the-month investment, and many often are burned in the following sell-off after the initial hype.
“Since every theme focuses on different aspects, it is possible that some have already lived their time,” Kunal Sawhney, CEO at independent research firm Kalkine, told Reuters.
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