Thematic ETFs: What They Are & How to Invest

Investing
Updated: 17th Jan 2021
Written by Sean Graytok
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Several factors have contributed to the soaring popularity of exchange-traded funds in the last decade. They offer friendlier fees than mutual funds while maintaining the same level of diversification.

There are many kinds of ETFs, which vary by sector, style (growth vs value), and even currencies. This article will explore the rise of thematic ETFs and if they’re right for you.

What is a Thematic ETF?

A thematic ETF is a fund where all its assets are focused on a theme rather than being tied to a broad market index or to a specific asset class.

A fund will select holdings based on their exposure to one or more investment themes, such as cloud computing or genomics research.

However, themes are not limited to niche subsectors of an industry. Thematics ETFs can focus on macroeconomic or structural trends, like betting on an emerging market in Asia or identifying vulnerabilities in zombie industries.

Related: What is an Index Fund?

Understanding Thematic ETFs

Thematics are flexible and enable investors to hone in on potential market opportunities without picking individual stocks. This kind of limited diversification distinguishes thematics from other types of ETFs.

However, there are varying degrees of specificity within the thematic arena. For example, there are thematic ETFs that track the broad field of Artificial Intelligence and others that invest in specific kinds of artificial intelligence, such as “reactive machines” companies or ones more focused on “artificial narrow intelligence.” As you can see, there are levels of thematics.

It’s important to know that thematic ETFs have a bias toward growth stocks. Remember, these funds are trying to capitalize on anticipated growth within a specific niche. Their holdings must reflect this strategy.

This bias towards growth contributes to the volatility and risk associated with thematic ETFs. Many of these ETFs invest in smaller companies that are hyper-focused on developing one kind of technology or product.

So, while these companies have plenty of room for growth, competition within the space is fierce, and failure is common.

Thematic funds consist mostly of companies that comply with the overarching theme but can include any asset that meets the fund’s requirements.

For example, one blockchain ETF may focus on companies developing the underlying technology while another ETF may target companies poised to benefit from the resulting Innovation.

Investors should look under the hood of the fund to ensure its structure is consistent with their goals. Sometimes, the ETF lines can be blurry, and its allocations may not reflect its general theme.

Ready to Dive into Some of the best thematic ETFs? Check out our article about ARK ETFs

Advantages of Thematic ETFs

  • The rise of thematics didn’t happen by accident. Let’s look at the advantages of investing in thematic ETFs.
  • High flexibility
  • High potential for growth
  • No sector, geographic, or size constraints that are common in general ETFs
  • Every theme under the sun has a fund to invest in
  • Diversification within specific investing strategies
  • Customizable

Disadvantages of Thematic ETFs

Many of the benefits of thematics can also come with adverse outcomes. According to the Wall Street Journal, about 28% of the US-based thematic ETFs launched before 2012 have now closed. In Europe, that number is 80%.

Here are some warnings to consider before investing in thematic ETFs:

  • Volatility
  • Several themes have already been priced in
  • Themes can be overpriced
  • The fund’s structure may not accurately reflect the investor’s bet (can be right about the theme but may not reap the rewards)
  • High expense ratios
  • Trends can phase out quickly

Ready to Start Investing? Check out our Guide on How to Start Investing

Best Thematic ETFs

Now you understand the definition of a thematic ETF and some of its pros and cons. Let’s look at the most popular thematic ETFs on the market.

#1. ARK Innovation ETF (ARKK)

Ark’s Innovation is the flagship actively managed fund from Catherine Wood’s team at ARK Invest. ARKK launched in 2014 and is up almost 600% since its inception.

Catherine Wood has built her reputation by beating the market time and time again. The fund has a strong allocation towards technology and healthcare, including stocks like Tesla, Roku, CRISPR Therapeutics, and Square

#2. First Trust Cloud Computing ETF (SKYY)

SKYY is the first ETF to offer exposure to the cloud computing industry and its fast-growing application. SKYY launched in 2011 and is up 375% since its inception.

Moreover, SKYY is one of the most popular thematic ETFs on the market, benefitting from the recent decade’s cloud computing boom. Its top holdings are Oracle, MongoDB, Microsoft, and VMware.

#3. Global X Robotics & Artificial Intelligence ETF (BOTZ)

BOTZ invests in an index of companies that will benefit from the growing adoption of automation, robotics, and artificial intelligence. BOTZ launched in 2016 and is up 133% since its inception.

This thematic ETF has benefitted from the extraordinary progress and hype generated by the artificial intelligence community. Its top holdings are Fanuc, NVIDIA, Intuitive Surgical, and ABB Ltd.

#4. Amplify Transformational Data Sharing ETF (BLOK)

BLOK invests in developing or involved companies in blockchain, the technology that powers cryptocurrencies like Bitcoin. The fund launched in 2018 and is up almost 100% percent since its inception.

BLOK is among four other ETFs focusing on the mass adoption of blockchain technology. Its top holdings are Marathon Patent Group, MicroStrategy, Square, and PayPal.

Related: Best Blockchain ETFs to Buy

#5. ETFMG Alternative Harvest ETF (MJ)

MJ was the first pure-play cannabis ETF listed in the U.S and tracks an index of companies involved in the legal business of growing, marketing, and selling cannabis products for medical and recreational use. It launched in 2015 and is down 30% since its inception.

Potential regulation over the cannabis industry has loomed for years, and investors that bought MJ at its highs are still coming down. Its top holdings are Aphria, Canopy Growth, Tilray, and Grow Generation.

#6. ARK Genomic Revolution ETF (ARKG)

Cathie Wood is back with her actively managed fund that picks companies best positioned to profit from advancements in energy, automation, manufacturing, materials, and transportation. The fund launched in 2014 and is up 419% since its inception.

The controversial field of genomic research has made incredible strides in recent years. Some believe that humans will be a-mortal by the year 2050. ARKG’s top holdings are Pacific Biosciences of California, Teladoc Health, Twist Bioscience, and CRISPR Therapeutics.

#7. iShares Global Clean Energy ETF (ICLN)

ICLN follows the S&P Global Clean Energy Index, which focuses on foreign and domestic companies in the alternative energy space, such as wind and solar power firms.

The fund launched in 2008 and is down 3% since its inception, but up 265% in the last two years.

ICLN is one of the few alternative energy ETFs available on the market considering the small number of publicly traded clean energy stocks. Its top holdings are Plug Power, Enphase Energy, Meridian Energy, and Xinyi Solar.

#8. Invesco Solar ETF (TAN)

TAN offers hyper-targeted exposure to the solar power energy industry. You got to appreciate the creativity of these ticker names. The fund launched in 2008 is down 56% since its inception but has rallied 467% in the last two years.

TAN competes with ICLN for investors betting on alternative energy. There are only about 35 stocks in its fund, with its top holdings consisting of Enphase Energy, Sunrun, Solaredge Technologies, and Xinyi Solar.

#9. First Trust NASDAQ Cybersecurity ETF (CIBR)

CIBR tracks an index of companies involved in the cybersecurity segment of the tech and industrial sectors. The fund launched in 2015 and is up 127% since its inception.

After years of chasing the first launched cybersecurity ETF called HACK, CIBR recently surpassed it in terms of AUM and inflows and is now on top of the cybersecurity domain. CIBR’s top holdings are Crowdstrike, Zscaler, Cisco Systems, and Accenture.

#10. VanEck Vectors Video Gaming and eSports ETF (ESPO)

ESPO tracks an index of fewer than 30 companies involved in gaming and esports development, hardware, and software, including casinos and online betting. The fund launched in 2018 and is up 45% since its inception.

The rise of eSports is showing no signs of slowing down, and investors are taking notice. ESPO’s top constituents are NVIDIA, Tencent, Advanced Micro Devices, and Bilibili.

How to Invest in Thematic ETFs

#1. Choose a Broker

Vanguard and Charles Schwab will likely have every thematic ETF on the market. Some of the new brokerage firms are geared for stock trading and may be missing the smaller thematics.

More Options: Best Online Stock Brokers

#2. Fund Your Account

It’s never been easier or safer to connect your bank to your Vanguard account. You may be required to verify your identity by confirming “micro deposits” from the broker, but this is straightforward and a great layer of security.

#3. Pick your Thematic ETFs

If you’re unsure where to invest, check out the Motley Fool for guidance. They have made generational stock picks, and their readers are always ahead of the crowd.

Need Help? See Motley Fool Review

Thematic ETFs FAQ

What does thematic investing mean?

Thematic investing means to invest in “themes” or “trends” that are new on the street. Thematic ETFs hold companies that develop or are poised to benefit from the success of the trend.

The most popular themes in 2021 are artificial intelligence, eSports, alternative energy, cannabis, cloud computing, blockchain technology, and fintech innovation.

Are ETFs dangerous?

ETFs can lose money like any other investment vehicle, but they are considered less risky than stocks because of their diversification. A single ETF can have exposure to hundreds of companies.

What is the best ETF for 2021?

The answer to this question depends on the risk appetite for each individual investor. Many try and many fail to beat the market and outperform the S&P 500 Index. Vanguard’s S&P 500 ETF (VOO) achieved a 13.82% compounded annual return in the last 10 years.

Are ETFs still a good investment?

The ETF boom following the 2008 Financial Crisis is still going strong. Investors looking for low fees and diversification prefer ETFs to mutual funds and individual stocks.

Bottom Line: Thematic ETFs

Thematics ETFs are a great tool for investors looking to make a little bet on a trend.

While many traders capitalize on fleeting trends and take short-term profits, others buy and hold and believe specific kinds of Innovation are here to stay.

The combination of flexibility and diversification makes thematic ETFs, unlike any other asset class. Get started investing in thematic ETFs today.

More Investing Resources:

Sean Graytok
Sean Graytok
Sean is a student of the financial and technology industry. He is interested in the people and companies who are driving the innovation that will change our future.