Thematic ETFs investing in everything from meme stocks to space travel have boomed — but they're expensive and don't beat the market, JPMorgan says

• The allure of investing in next-generation themes like robots and space travel doesn't lead to outperformance for investors, according to JPMorgan.
• The bank analyzed the performance of various thematic ETFs and found they're expensive and often pay high prices for "hot" stocks.
• "High expenses and negative long-term alpha suggest the universe of thematic funds does not belong in one's strategic asset allocation," JPMorgan said.
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Thematic investing has boomed in recent years, with assets invested in disruptive themes tripling over the past two years.

The success has benefited thematic investment managers like ARK Invest, which was an early buyer of Tesla and saw its assets under management skyrocket since its inception in 2014.

But the allure of investing in thematic ETFs that target various trends like robotics, space exploration, and renewable energy doesn't benefit the end investor in the long-term due to high fees and underperformance relative to the broader stock market, according to a Tuesday note from JPMorgan.

The bank analyzed a broad set of 1,000 thematic funds over the past 16 years and found that they underperformed global equities by 1.6%. Much of the underperformance is due to high investment fees of more than 1%, and buying "hot" stocks at high prices.

"Our guess is that thematic funds get launched and attract a lot of inflows when certain themes become 'hot.' This suggests that thematic funds pay high prices for the stocks they select as they buy companies in sectors that fit the hot theme and where the theme is fully priced in," JPMorgan explained.

This dynamic has played out in popular thematic ETFs managed by Ark Invest, which saw a surge in inflows as trending stocks like Tesla boomed. But high valuations and few profits generated by its underlying holdings fell out of favor amid a period of rising interest rates, leading to a deflation in assets and performance.

Thematic investment strategies "are overall high beta, with a focus on future growth, but are also negative alpha, maybe as they pay high prices for 'hot' stocks and themes," JPMorgan said. Additionally, thematic funds charge on average 55 basis points more in fees relative to a passive global equity portfolio.

"High expenses and negative long-term alpha suggest the universe of thematic funds does not belong in one's strategic asset allocation," JPMorgan said.

JPMorgan admits there's nothing wrong with expressing a particular theme through your investments, and investors can improve their chances of outperforming the market via thematic funds by investing in low-cost thematic ETFs, particularly thematic ETFs that are attached to a passive index rather than actively managed.

"In principle, there is nothing wrong with investing in views of a changing future, as we advised in many of our strategic notes. But one needs to be 'economical' with how one does this, selecting funds that charge no more than 1%," JPMorgan concluded.