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The Dark Side of Thematic Funds

Funds with compelling stories don't always make sound investments.

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Thematic funds--which focus on emerging trends such as clean energy, robotics, legalized marijuana, or working from home--have been all the rage lately. Roughly 150 such funds have hit the market over the past three years. They’ve also been met with an enthusiastic reception; in fact, some of the industry’s fastest-growing offerings are sector funds defined around a specific theme, including the extremely popular ARK Innovation ETF (ARKK) and its theme-based siblings focusing on fintech, genomics, autonomous technology and robotics, and next-generation Internet stocks.

These funds have an understandable appeal. It’s easy to get excited about evolving technologies such as genomics, a new field of biotechnology that involves using genetic maps and DNA sequencing to improve medical outcomes. These technologies have the potential to revolutionize the field of medicine and improve millions of lives. New technologies like these come with a compelling story that’s easy to understand. But investment themes that make a good narrative don’t necessarily generate high enough returns to compensate for their risk. In this article, I’ll dig into some of the pitfalls of thematic funds.

Amy C. Arnott does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.