From Morningstar: 2024-04-23 13:44:00

Thematic funds are highly concentrated, making the valuation of their small stock portfolios crucial. Looking at thematic ETFs focused on artificial intelligence, some are overvalued while others are undervalued based on Morningstar’s fair value estimates for the underlying holdings. Thematic ETFs outside the AI space, like those focused on climate transition, can also be undervalued due to hype cycles and performance fluctuations. On the other hand, funds invested in AI, automation, and defense are generally overvalued amidst geopolitical uncertainty and strong demand. China Internet ETFs are among the most undervalued due to economic struggles and regulatory crackdowns. Similarly, EV battery-focused ETFs are undervalued amid concerns about EV adoption speed. Thematic funds cater to specific trends, making them inherently risky and volatile. Morningstar analyst Kenneth Lamont advises investors to understand the concentration and volatility of thematic funds before investing. Morningstar used ETFs’ market capitalization to analyze valuations and ratings of their underlying holdings, providing insights to investors regarding fair values and long-term intrinsic values. Fair values are estimates of a stock’s future cash generation, helping investors look beyond current stock prices. This data gives investors a comprehensive understanding of thematic funds’ risks and potential returns.



Read more at Morningstar: Are All Thematic ETFs Overvalued? No, Not Even in AI