Be cautious with thematic offerings

By Morningstar |  29-07-21 | 

Thematic exchange traded funds, or ETFs, are picking up in momentum.

Morningstar’s fund research team has noted that over the last quarter, broader index-based ETFs (such as Nifty 50, Sensex, Nifty Next 50) received the highest flows. Apart from this, certain theme-based ETFs, particularly among the Healthcare and Financial Services categories, have seen impressive flows too. While flows into Gold ETFs have been steady, its quantum has reduced over the quarter ended June 2021 relative to the previous quarter.


Globally, the options are staggering - from blockchain to cloud computing, and clean energy to cybersecurity and genomics. In India the options are mainly gold, pharma, infotech, financial services, and ESG. Silver may be on the cards soon.

Many novice investors are unsure which “cap” best suits them - large, mid, small, multi, or flexi. For them, starting out with an ETF could be the best thing to do.

Thematic ETFs are different. They are an easy way to play a trend rather than trying to pick a winner, allowing you to ride the wave that’s carrying the whole sector. But a note of caution. If you do opt for a sector or thematic ETF, please do not put all your money into it. Give it a small allocation in your portfolio and be very certain as to why you are investing in it.

For example, Swarup Mohanty, the CEO of Mirae Asset AMC, tweeted that if an investor was to build an entire basket of ETFs from his AMC, his suggestion would be to have three in a core portfolio (Nifty 50, Nifty Next50, ESG Sector Leaders) and two satellite holdings (NYSE FANG+, Nifty Financial Services).

Kaustubh Belapurkar, director of fund research at Morningstar India, says that sectoral, thematic and smart beta ETFs should be used with immense clarity. “They should be used by investors who have the wherewithal to form and take a view on that particular sector, theme or style. Investors shouldn’t invest in these just because the recent performance is looking good. Markets go through sector rotation, thus chasing performance can be counterproductive,” he says.

If you are chasing the latest fad, it is good to remember that the story is probably over when everyone loves it.

Please read Questions to answer before you invest in a sector or thematic fund.

  1. Are you driven by the marketing spiel?
  2. Are you driven by recent performance?
  3. Has the market appropriately priced the trend?
  4. How much is your allocation?
  5. What is your investment thesis?
  6. What is your exit strategy?
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