Thematic exchange-traded funds, or ETFs, allow you to invest in a number of the hottest trends and industries — from blockchain to cloud computing, and clean energy to cybersecurity. Thematic ETFs are an easy way to play a trend rather than trying to pick a winner, allowing you to ride the wave that’s carrying the whole sector.
Here are some thematic ETFs in the market’s hottest industries, including how big they are, their largest positions and how much they’ll cost you to own.
What is a thematic ETF?
A thematic ETF is a fund that offers the opportunity to invest based on a particular theme, such as climate change or artificial intelligence. The ETF then holds companies that should benefit from that trend.
While traditional ETFs are often based on a broad market index where investors can achieve diversification at a low cost, you likely won’t be sufficiently diversified just by owning a thematic ETF, because the companies’ fortunes will be heavily tied to the same underlying trend.
How a thematic ETF works
While ETFs first began as a cheap way to invest in the , they’re now a way to buy slices of any “exposure” you want. Looking for a specific country, industry or investing style? It’s a good bet there’s an ETF doing what you’re looking for. For example, new thematic ETFs get you a slice of red-hot industries.
Thematic ETFs allow investors who don’t want to do all the analytical work on individual companies to simply buy the industry or trend. So if you see the potential in cloud computing, you can buy the ETF and get a diversified cross-section of the industry at low expense and hassle.
Most ETFs work by replicating a specific weighted index of stocks, and thematic ETFs are often no different. They’ll buy whatever stock is in the index and weight it accordingly in the portfolio. By buying one share of the ETF you’re buying a stake in all the companies in the fund, gaining quick exposure to the theme and a narrow diversification across the companies there.
For that privilege, you’ll pay the fund manager an expense ratio. That’s a management fee measured as a percentage of the money you have invested in the fund. While the cost is quoted at an annual rate, the fee is deducted almost undetectably each day from the fund’s value.
Thematic ETFs are somewhat more expensive than some of the most popular index ETFs such as those based on the S&P 500. Fees on those popular funds can run less than 0.1 percent per year. In other words, you’ll pay $10 for every $10,000 you have invested in the fund.
While thematic ETF fees may be pricier than these cheap funds, they’re largely in line with the average expense ratio. Typically they’ll charge somewhere between 0.5 and 0.75 percent, meaning you’ll ultimately spend between $50 and $75 each year for every $10,000 invested.
If there’s a downside, the fund could be seriously hurt if something hits the sector or investors decide they don’t like it, and a thematic ETF’s narrow diversification won’t help reduce this risk.
These thematic ETFs often have playful ticker symbols indicating what they are. For example, the symbol for the cloud computing fund is SKYY.
7 popular thematic ETFs
Below are seven of the best thematic funds that invest in some of the market’s hottest industries, with data as of Oct. 12, 2023.
1. First Trust Cloud Computing ETF (SKYY)
This index ETF invests in companies that make money in cloud computing, a sector of the market that supplies on-demand services via the internet, such as data storage or computing power. The ETF has enjoyed a 9.4 percent annualized return in the previous five years. The fund caps the position size of each stock to 4.5 percent of total assets.
- Top 5 holdings: Pure Storage, Nutanix, Alphabet, IBM and Microsoft
- Net assets: $2.7 billion
- Expense ratio: 0.60 percent
2. ARK Innovation ETF (ARKK)
This actively managed ETF invests in what the fund manager calls disruptive innovation, new products or services that could dramatically shift how the world works. Investments include genomics stocks, energy and automation technologies, shared infrastructure and services as well as fintech innovators. Over the last five years, the ETF averaged -0.5 percent annually.
- Top 5 holdings: Tesla, Zoom, Coinbase, Roku and UiPath
- Net assets: $6.9 billion
- Expense ratio: 0.75 percent
3. Global X Robotics & Artificial Intelligence ETF (BOTZ)
This index ETF invests in companies that could benefit from the proliferation of robotics and artificial intelligence, including such products as industrial robots and automation as well as autonomous driving. The fund tracks the Indxx Global Robotics & Artificial Intelligence Index. The ETF has returned about 5 percent annually over the past five years.
- Top 5 holdings: Nvidia, Keyence, Intuitive Surgical, ABB and Fanuc
- Net assets: $2.1 billion
- Expense ratio: 0.69 percent
4. First Trust NASDAQ Cybersecurity ETF (CIBR)
This fund’s ticker symbol indicates what it invests in – cybersecurity companies – and it tracks the Nasdaq CTA Cybersecurity Index. More specifically, it owns cybersecurity companies in the technology and industrial sectors, including those protecting networks, computers and mobile devices. The fund returned about 14.1 percent annually over the last five years.
- Top 5 holdings: Palo Alto Networks, Infosys, Fortinet, Cisco Systems and Broadcom
- Net assets: $5.0 billion
- Expense ratio: 0.60 percent
5. iShares Global Clean Energy ETF (ICLN)
This fund is sponsored by BlackRock, one of the world’s largest fund companies, and it tracks an index of global clean energy companies, including those involved with solar, wind and other renewable sources. The fund returned about 13.6 percent annually over the previous five years.
- Top 5 holdings: Vestas Wind Systems, Enphase Energy, First Solar, Iberdrola SA and Consolidated Edison
- Net assets: $3.1 billion
- Expense ratio: 0.41 percent
6. ARK Genomic Revolution ETF (ARKG)
Medical technology is one of the most exciting industries, and this actively managed fund is looking for those companies that can extend and improve human life through technological and scientific breakthroughs, and include those working with gene editing, stem cells and targeted therapeutics. The fund lost about 0.1 percent annually over the prior five years.
- Top 5 holdings: Ionis Pharmaceuticals, Pacific Biosciences of California, Exact Sciences, Ginkgo Bioworks and Schrodinger
- Net assets: $1.8 billion
- Expense ratio: 0.75 percent
7. Amplify Transformational Data Sharing ETF (BLOK)
Like its name suggests, this actively managed ETF invests in companies that develop and use blockchain technologies, the process behind cryptocurrency such as Bitcoin. The fund is relatively new, having been founded in January 2018, and so it’s also relatively small. The fund returned around 6.1 percent annually over the past five years.
- Top 5 holdings: MicroStrategy, Coinbase, SBI Holdings, Accenture and Galaxy Digital
- Net assets: $435.5 million
- Expense ratio: 0.75 percent
Pros and cons of thematic investing
Thematic ETFs are popular for a number of reasons, but they also have some drawbacks. Here are some of the most important pros and cons of this approach.
Pros of thematic investing
- Flexibility – Thematic ETFs offer investors a way to invest in a targeted “slice” of the market quickly and then sell it just as easily if they think the opportunity has run its course.
- Diversification – Thematic ETFs may offer narrow diversification (all companies in a given industry) or broader diversification (companies across industries), but either way they put your eggs in more than one basket, reducing your risk.
- Ease – Rather than needing to research and buy multiple stocks, you can know less about the individual companies and get in and out of the market with one transaction.
- Low cost – You’ll pay a fee to the fund company running the ETF, but it’s often not so expensive for the diversification and expertise offered by the manager.
Cons of thematic investing
- Higher risk than more diversified funds – A thematic ETF may be exposed to certain risks – such as declining multiples on growth stocks or specific sector risks – that make them riskier than more broadly diversified funds such as an S&P 500 index fund.
- Volatility – Higher risk can translate into higher volatility, both on the upside and downside, especially for narrowly diversified funds.
- May need to more actively manage – If you’re trying to use thematic ETFs to play a hot trend, you may want to actively manage them more so than you would for a typical broadly diversified index fund such as the S&P 500, where passive investing is a better approach.
Bottom line
From low costs to instant diversification to the ability to invest in a hot sector in one click, ETFs offer investors a lot of benefits. However, as you’re investing in these funds, pay attention to their holdings, because some funds won’t always own what their name indicates. You want to get what you’re paying for and not a high-priced fund with the same stocks as every other fund.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.
