Thematic Funds Balloon in Canada

Investors are piling into trendy investments

Ian Tam, CFA 18 May, 2021 | 4:28AM
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Thematic funds are those that invest across multiple sub-industries, often tying to a story that expands beyond traditional economic sectors. 3d printing, gaming and e-sports, cannabis, machine-learning, and blockchain are just examples of themes that Morningstar has identified under our Thematic Fund Taxonomy.

List of thematic fund categories

For a larger image of the list of themes, click here.

Our global report has shown that the growth in this space (mostly in Europe) has ballooned in recent years, and the story is no different here in Canada. Just over 30 funds identified in our Global Thematic Fund Report belong to Canadian domiciled fund managers. For reference, the core themes prevalent amongst the universe of Canadian-domiciled funds appear as follows, sorted by size of assets:

Core themes of funds

Source: Morningstar Direct | Data as of April 30, 2021

*biotechnology, robotics, artificial intelligence (AI), nanotechnology

Regardless of the small number of funds, the trend is clear in terms of fund manufacturers launching new thematic products, particularly before the pandemic.

Exhibit 2

Investors as well seem to be piling assets into said funds with a growing interest in recent years both in terms of estimated net inflows and overall level of assets.

Exhibit 3


Exhibit 4

Are Thematic Funds a Good Fit for Retail Investors?

My colleague Ben Johnson raises a valid point about the suitability of thematic funds for retail investors. Investing in a theme means that you are effectively placing three bets: (1) That you’ve chosen the right theme, (2) that you’ve picked the right manager to exploit said theme and (3) that the stocks held in the thematic fund have not already realized their value. Our global report not only shows that in general thematic funds tend to underperform traditional indices, but that the mortality rate of thematic funds is high:

Exhibit 9

Though we can’t draw the same conclusion for just Canadian-domiciled products due to the small number of funds and relatively short history, what we can caution is that returns can be unpredictable. The eye-popping returns of some of these funds in the trailing 12 months have certainly warranted some attention from investors. However, when looking at the universe of funds that exist today, we can see that results vary dramatically.  

Total Returns of Canadian-domiciled Thematic Funds

List of funds

Source: Morningstar Direct | Data as of May 11, 2021

Are Thematic Funds Right for You?

The potential for immense gains when investing in a theme is certainly possible, as is the potential for losses. Hence it would make sense to treat volatile funds as the riskier sleeves within the overall asset allocation.

Thematic funds are highly saleable products because they often tell a story that people can understand and get excited over. Alas, much to my chagrin, investing is not supposed to be exciting. A conservative approach coupled with a laser-sharp focus on your financial goals will yield better results toward your financial goals instead of latching onto a well-told story. 

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About Author

Ian Tam, CFA  is Investment Specialist at Morningstar Canada. 


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