Thematic ETFs

Exchange-traded funds (ETFs) are extremely versatile. They allow investors to purchase different equity styles, geographies, sectors or industries all in a single ticker. For example, investors can easily buy value stocks, U.S. market stocks, technology sector stocks or regional banking industry stocks with an ETF.

Investors can buy shares in another special type of equity ETF – the thematic ETF. Instead of investing in styles, geographies, sectors or industries, these ETFs target big ideas and long-term trends. If you're looking to invest for growth and focus on futuristic innovation, these ETFs might be what you're looking for.

Investing in thematic ETF isn't always straightforward, given the vast number of options out there competing for your money. This guide will help you understand the best ways to select the ideal thematic ETF for your portfolio. 

What are Thematic ETFs?

According to BlackRock, a thematic ETF holds a basket of stocks that is "positioned to benefit from potential shifts in technology, society, the environment and demographics over time."

The key to understanding thematic ETFs is visualizing them as a way to take part in structural changes in various markets, sectors and industries. For example, investing in a thematic ETF that tracks electric vehicles (EVs) is essentially a bet on the automotive industry and consumers shifting from internal combustion engines to electric.

Thematic ETFs are a relatively new invention, but the idea of thematic investing is not. Historical examples include people who invested in Ford Motor Co. (NYSE: F) when cars started to replace the horse-drawn buggy and people who invested in e-commerce companies like Amazon Inc. (NASDAQ: AMZN) during the dot-com bubble. 

However, picking the right stocks to take part in a thematic megatrend can be difficult. After all, for every successful company that thrives during these structural changes, countless others fall by the wayside or go bankrupt. Picking winners ahead of time is hard, especially when it comes to high-growth, disruptive innovation. 

This is where a thematic ETF can come in handy. By holding a portfolio of companies that participate in a specific thematic megatrend, these ETFs offer higher diversification. By buying one of these ETFs, investors can bet on an overall thematic megatrend instead of a single company, which can reduce risk. Thematic ETFs are a straightforward way to invest in an innovative trend.

Types of Thematic ETFs

Thematic ETFs are mostly categorized by their underlying theme, idea or trend. There's no limit to the types of thematic ETFs that could exist, as new trends will constantly come and go. Here's a breakdown of some of the current and notable trends on the market, along with thematic ETFs that fall into each category:

General Innovation

These ETFs target a diversified portfolio of companies involved in multiple disruptive or innovative niches. A great example is the ARK Innovation ETF (NYSEARCA: ARKK), which holds stocks involved in genomics, automation, robotics, AI and fintech.

Clean Energy

These ETFs target companies involved in the development, production or distribution of clean energy sources. They can be a high-growth alternative to traditional energy sector ETFs that mostly hold fossil fuel companies. Examples include the iShares Global Clean Energy ETF (NASDAQ: ICLN), the Invesco Solar ETF (NYSEARCA: TAN) and the First Trust Global Wind Energy ETF (NYSEARCA: FAN).

Cybersecurity

These ETFs hold companies that develop or provide cybersecurity software and services, which have become increasingly important in today's connected world. Examples include the First Trust NASDAQ Cybersecurity ETF (NASDAQ: CIBR), the ETFMG Prime Cyber Security ETF (NYSEARCA: HACK) and the Global X Cybersecurity ETF (NASDAQ: BUG)

Electric Vehicles

These ETFs hold companies that manufacture EVs or companies that produce raw materials or components essential to their supply chains. Examples include the Global X Lithium & Battery Tech ETF (NYSEARCA: LIT), the Global X Autonomous and Electric Vehicles ETF (NASDAQ: DRIV) and the iShares Self-Driving EV and Tech ETF (NYSEARCA: IDRV).

Automation and Robotics

These ETFs focus on companies that produce the hardware and software needed to develop automation and robotics solutions. Examples include the ARK Autonomous Technology & Robotics ETF (BATS: ARKQ), the ROBO Global Robotics and Automation Index ETF (NYSEARCA: ROBO) and the Global X Robotics & Artificial Intelligence ETF (NASDAQ: BOTZ).

Other thematic trends tracked by ETFs include water, genomics, infrastructure, next-generation internet, fintech, energy transition, video games and marijuana to name a few. As time goes on, more thematic mega-trends will emerge, with new ETFs popping up for investors to bet on them.

Benefits of Thematic ETFs

Thematic ETFs are popular among younger, higher-risk tolerance investors for a number of reasons. The main benefits these ETFs offer include:

Targeted Investment Exposure

Thematic ETFs give investors the opportunity to concentrate their portfolios on particular trends or themes like technology, renewable energy, or healthcare innovation. This focused approach helps investors take advantage of sectors they think will grow significantly.

Diversification

Investing in a thematic ETF allows investors to access a group of securities related to a specific theme, which helps to reduce risk. This diversification can provide more stable returns by lessening the effects of underperforming individual stocks.

Simplicity and Convenience

Thematic ETFs make investing easier by offering a bundled option that includes various companies tied to a specific theme, allowing investors to engage with emerging trends without having to research each stock in detail.

Cost-Effectiveness

Thematic ETFs typically have lower expense ratios than actively managed funds, which makes them a more affordable option for investing in particular market trends. Reduced fees can improve overall returns over time, particularly for long-term investors.

Accessibility

Thematic ETFs can be bought and sold on major exchanges like stocks, which makes them available to many investors. This gives people, no matter what their level of investment knowledge is, the chance to enter specific markets and take advantage of emerging trends without facing major obstacles.

Drawbacks of Thematic ETFs

Not all investors may find a thematic ETF appropriate for their portfolio. Some reasons investors may avoid thematic ETFs include:

Concentration Risk

Thematic ETFs usually target specific sectors or trends, which might reduce diversification. If the selected theme does poorly or encounters difficulties, the whole ETF could experience greater losses compared to a more diverse fund.

Market Volatility

Thematic investments generally focus on emerging trends or specific markets, which can make them more vulnerable to market fluctuations. Investors who are unprepared may experience significant losses due to these price changes.

Short-Term Focus

Some thematic ETFs are developed based on popular trends that might not endure over time. This focus on short-term performance can prompt investors to pursue temporary market trends rather than committing to long-term investments, which raises the risk of losses when the theme falls out of favor.

Higher Management Fees

Thematic ETFs can have higher expense ratios compared to traditional ETFs because they need more research and analysis to identify and manage themes. These increased costs can reduce overall returns, particularly in a challenging market situation.

Limited Historical Data

Thematic ETFs typically focus on new or emerging trends, which may result in a lack of historical data for performance analysis. This uncertainty can complicate investors' ability to assess the potential risks and rewards of these funds, creating challenges in making well-informed investment choices.

Compare ETF Brokers

Investors looking to research and choose the best thematic ETFs can use Benzinga to compare the available selections available on the market. Here is a list of brokers that support thematic ETF trading and offer research tools to help investors select the right one.

Frequently Asked Questions