It’s safe to say that markets have laid bare the highs and lows of thematic investing in recent years. iShares Global Clean Energy UCITS ETF (INRG), a poster child of the space, made a sterling return of around 132 per cent in the halcyon days of 2020 before falling by nearly a fifth when markets rotated in 2021. The iShares vehicle actually held up ok in sterling terms in a tricky 2022 – but many other thematic exchange traded funds (ETFs) have not.
WisdomTree Cloud Computing UCITS ETF (KLWD) and Invesco CoinShares Global Blockchain UCITS ETF (BCHS) were down by around 45 per cent for the year, to name a couple of especially hard-hit ETFs. From food security funds to digitalisation portfolios, cyber security ETFs, ecommerce and healthcare innovation plays, a huge swathe of other thematic offerings also made big losses in a tough year. Many of these funds have rebounded fiercely so far in 2023 – pretty much on trend with what’s happened in the broader market, but also showing once again how big an effect timing can have on your thematic returns.
We could try to highlight a few funds that did manage to get through 2022 in decent shape, but the pickings are slim. The iShares clean energy fund may have sustained relatively modest dollar losses in 2022, something that translated into a positive once converted to sterling terms, but its rivals fared worse, with Invesco Global Clean Energy UCITS ETF (GCLX) registering a loss of more than a fifth. The good news is not obvious elsewhere either: the L&G Pharma Breakthrough UCITS ETF (BIGT) was one of the better-performing thematic funds, having made a small gain thanks to currency effects, but sat on a loss of more than 7 per cent in dollar terms. By contrast, iShares Agribusiness UCITS ETF (SPAG) actually made a modest gain in US dollar terms, something that translated into a 15.5 per cent return for those on UK shores.
Longer timeframes are also generally discouraging for thematic performance. The S&P 500 index – an easy route to some exposure to tech, growth and an array of interesting themes – had made a 74.7 per cent return in sterling terms over the five years to 20 February 2023. The iShares clean energy fund and some others such as L&G Battery Value-Chain UCITS ETF (BATG) do outpace the US market over that period, but it’s rare to find many thematic portfolios that do so.
It seems they are either best suited if you can time the market well (a rare trait) or believe in both the long-term appeal of the theme and the portfolio constructed to target it. That leaves many investors better off looking elsewhere.
Such funds at least tend to disclose their holdings in a pretty comprehensive fashion. We might therefore at least use their literature to get an idea of which stocks are doing well in a particular sector – take iShares Global Clean Energy's top holding Enphase Energy (US:ENPH) and its huge returns of the past year, or names such as Deere (US:DE) in iShares Agribusiness. They can show us companies that might merit further research – and those ones that arguably already look pretty fully valued. But the portfolios themselves still leave much to be desired.
