Thematic exchange-traded funds, or ETFs, allow you to invest in some of the hottest trends and industries – from blockchain to cloud computing, and from clean energy to cybersecurity. Thematic ETFs are an easy way to ride a trend rather than trying to pick a winner, allowing you to ride the wave that is sweeping the entire sector.
Here are some thematic ETFs in the market’s hottest sectors, including how big they are, their largest holdings and how much they will cost you to own.
What is a thematic ETF?
A thematic ETF is a fund that offers the opportunity to invest based on a specific theme, such as climate change or artificial intelligence. The ETF then contains 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 diversified enough just by owning a thematic ETF, as the companies’ fortunes will be strongly tied to the same underlying trend. .
These thematic ETFs often have playful ticker symbols that indicate what they are. For example, the symbol for the cloud computing fund is SKYY.
7 Popular Thematic ETFs
Below are seven of the top thematic funds investing in some of the hottest industries on the market, with data as of April 8, 2024.
1. First Trust Cloud Computing ETF (SKYY)
This index ETF invests in companies that make money from cloud computing, a market sector that provides on-demand services via the Internet, such as data storage or computing power. The ETF has delivered an annualized return of 10.3 percent over the past five years. The fund limits the position size of each stock to 4.5 percent of total assets.
- Top 5 holdings: Alphabet, IBM, Oracle, Arista Networks and Microsoft
- Net assets: $3.1 billion
- Cost 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 change the way the world works. Investments include genomics stocks, energy and automation technologies, shared infrastructure and services, as well as fintech innovators. Over the past five years, the ETF has returned an average of 0.6 percent per year.
- Top 5 holdings: Tesla, Block, Coinbase Global, Roku and UiPath
- Net assets: $7.2 billion
- Cost 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 products such as industrial robots and automation, as well as autonomous driving. The fund tracks the Indxx Global Robotics & Artificial Intelligence Index. The ETF has returned approximately 8.9 percent annually over the past five years.
- Top 5 holdings: NVIDIA, Keyence, Intuitive Surgery, ABB and SMC
- Net assets: $2.8 billion
- Cost ratio: 0.68 percent
4. First Trust NASDAQ Cybersecurity ETF (CIBR)
This fund’s ticker symbol identifies what it invests in – cybersecurity companies – and tracks the Nasdaq CTA Cybersecurity Index. More specifically, the company owns cybersecurity companies in the technology and industrial sectors, including companies that protect networks, computers and mobile devices. The fund has returned approximately 15.2 percent annually over the past five years.
- Top 5 holdings: Palo Alto Networks, Infosys, CrowdStrike, Cisco Systems and Broadcom
- Net assets: $6.6 billion
- Cost ratio: 0.59 percent
5. iShares Global Clean Energy ETF (ICLN)
This fund is sponsored by BlackRock, one of the world’s largest fund companies, and tracks an index of global clean energy companies, including those involved in solar, wind and other renewables. The fund has returned approximately 8.0 percent annually over the past five years.
- Top 5 holdings: Vestas Wind Systems, Enphase Energy, First Solar, Orsted and NEXTracker
- Net assets: $2.4 billion
- Cost ratio: 0.41 percent
6. ARK Genomic Revolution ETF (ARKG)
Medical technology is one of the most exciting industries, and this actively managed fund looks for companies that can extend and improve human life through technological and scientific breakthroughs, including companies involved in gene editing, stem cells and targeted therapies. The fund has lost approximately -3.3 percent annually over the past five years.
- Top 5 holdings: CRSPR Therapeutics, Twist Bioscience, Physical Sciences, Recursion Pharmaceuticals and Beam Therapeutics
- Net assets: $1.5 billion
- Cost ratio: 0.75 percent
7. Strengthen the Transformative Data Sharing ETF (BLOK)
As the name suggests, this actively managed ETF invests in companies that develop and use blockchain technologies, the process behind cryptocurrency like Bitcoin. The fund is relatively new, founded in January 2018, and therefore relatively small. The fund has returned approximately 18.1 percent annually over the past five years.
- Top 5 holdings: MicroStrategy, Coinbase Global, Beyond, Cleanspark and Galaxy Digital
- Net assets: $701.8 million
- Cost ratio: 0.76 percent
How a thematic ETF works
While ETFs initially started as a low-cost way to invest in the Standard & Poor’s 500 Index, they are now a way to buy portions of any exposure you want. Looking for a specific country, sector or investment style? It’s a good bet that there’s an ETF that does what you’re looking for. For example, new thematic ETFs give you a slice of the red-hot industries.
Thematic ETFs allow investors who don’t want to do all the analytical work on individual companies to simply buy the sector or trend. So if you see the potential of cloud computing, you can buy the ETF and get a diversified cross-section of the sector at little cost and effort.
Most ETFs work by replicating a specifically weighted stock index, and thematic ETFs are often no different. They buy all the stocks in the index and weight them in the portfolio accordingly. By buying one share of the ETF, you buy a share of all the companies in the fund, giving you quick exposure to the theme and limited diversification across the companies there.
For that privilege, you pay the fund manager an expense ratio. This is a management fee, measured as a percentage of the money you have invested in the fund. Although the costs are stated on an annual basis, the fee is deducted from the value of the fund almost unnoticed every day.
If there is a downside, the fund could be seriously hurt if something hits the sector or if investors decide they don’t like it, and the limited diversification of a thematic ETF will not help mitigate this risk.
How much does a thematic ETF cost?
Thematic ETFs are slightly more expensive than some of the most popular index ETFs, such as those based on the S&P 500. Expenses for these popular funds can be less than 0.1 percent per year. In other words, you pay $10 for every $10,000 you invest in the fund.
While the fees for thematic ETFs can be more expensive than these low-cost funds, they are largely in line with the average expense ratio. They normally charge anywhere from 0.5 to 0.75 percent, meaning you’ll end up spending between $50 and $75 every year for every $10,000 invested.
Advantages and disadvantages of thematic investing
Thematic ETFs are popular for a number of reasons, but they also have some disadvantages. Here are some of the main pros and cons of this approach.
Benefits of thematic investing
- Flexibility – Thematic ETFs offer investors a way to quickly invest in a targeted “part” of the market and then just as easily sell it when they think the opportunity has passed.
- Diversification – Thematic ETFs can provide narrow diversification (all companies in a given sector) or broader diversification (companies across different sectors), but either way they put your eggs in more than one basket, reducing your risk.
- Ease – Instead of having to research and buy multiple stocks, you can know less about the individual companies and enter and exit the market in one transaction.
- Cheap – You pay a fee to the fund company that manages the ETF, but this is often not that expensive for the diversification and expertise the manager provides.
Disadvantages of thematic investing
- Higher risk than more diversified funds – A thematic ETF may be exposed to certain risks – such as declining growth stock prices or specific sector risks – making them riskier than more broadly diversified funds such as an S&P 500 index fund.
- Inconstancy – Higher risk can translate into higher volatility, both on the upside and downside, especially for closely diversified funds.
- More active management may be needed – If you’re trying to use thematic ETFs to capitalize on a popular trend, you may want to manage them more actively than with a typical broadly diversified index fund like the S&P 500, where passive investing is a better approach.
In short
From low costs to instant diversification to the ability to invest in a popular sector with one click, ETFs offer investors many benefits. However, when investing in these funds, pay attention to their investments, as some funds do not always own what their names indicate. You want to get what you pay for and not an expensive fund with the same shares as every other fund.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making any investment decision. In addition, investors are advised that the past performance of investment products does not guarantee future price increases.
