Chasing Megatrends or Managing Risk? Agency Dynamics in Thematic Investing

Abstract

Thematic exchange-traded funds (ETFs) have become a popular vehicle for gaining exposure to innovation and structural trends. This article studies how daily net flows, returns, and volatility interact in thematic equity ETFs across low- and high-volatility market conditions. With the use of daily data on more than 40 funds, we find clear return-chasing behavior: Inflows follow recent performance, but flow–performance sensitivity declines as fund volatility rises and is more restrained during periods of elevated aggregate market volatility. We find no evidence that investors disproportionately chase extreme winners in turbulent periods; instead, performance-based reallocations become more restrained. Finally, inflows are followed by modest increases in subsequent fund volatility, though this risk response is muted in high-volatility markets. Overall, our results suggest that thematic ETFs behave less like persistent alpha vehicles and more like high-volatility, growth-tilted factor exposures, implying a need for explicit risk budgeting and monitoring for risk drift.