Broad Vs Narrow Thematic ETFs

September 02, 2021

Diversification is a pillar of the ETF sales pitch, starting first with the passive broad index followers, and now with upstart thematic funds promising exposure to stocks and industries connected to a big idea on how the world is going to change.

But what’s the better tool for an investor looking to gain exposure to the theme investing ETF landscape: a handful of ETFs with their own thematic idea, or one ETF compassing multiple themes?

The question is as varied as the types of securities underlying the handfuls of ETFs that call themselves thematics.

Broad Vs. Narrow Thematics

The following is a list of ETFs that ETF.com data provider FactSet has flagged as broad thematic funds. ETFs with less than $50 million in assets under management are not included.

 

Ticker Fund AUM YTD Return Avg. Spread Holdings Expense Ratio
ARKK ARK Innovation ETF  $21.91B  -4.28% 0.02% 50 0.75%
KOMP SPDR S&P Kensho New Economies Composite ETF  $2.00B  10.44% 0.12% 495 0.20%
GINN Goldman Sachs Innovate Equity ETF  $484.54M  12.56% 0.19% 465 0.50%
TECB iShares U.S. Tech Breakthrough Multisector ETF  $450.19M  21.71% 0.07% 176 0.40%
DTEC ALPS Disruptive Technologies ETF  $238.88M  8.80% 0.15% 99 0.50%
MOON Direxion Moonshot Innovators ETF  $149.67M  3.16% 0.17% 50 0.65%
GXTG Global X Thematic Growth ETF $113.33M 18.46% 0.38% 266 0.50%
TMAT Main Thematic Innovation ETF  $74.00M  -0.21% 0.26% 12 1.65%

 

Each of these ETFs has its own set of adjectives to describe the themes they cover, but there is significant overlap. In general, these broad thematics provide exposure to genetic engineering research, artificial intelligence and Big Data processing, robotics and automation, digital connectivity and financial technology.

Renewable energy and electric vehicles also feature as themes chosen by some members of this particular group, but they aren’t as universal as those other five themes are.

Next, let’s look at some of the most popular single-theme ETFs. While ARK Invest has several of its own ETFs following these individual themes, we selected several competing funds from other issuers to prevent concentration on ARK’s funds.

 

Ticker Fund AUM YTD Return Avg. Spread Holdings Expense Ratio
ARKG ARK Genomic Revolution ETF $8.19B -11.19% 0.03% 59 0.75%
SKYY First Trust Cloud Computing ETF $6.36B 14.01% 0.04% 64 0.60%
ARKW ARK Next Generation Internet ETF $5.72B 1.54% 0.04% 47 0.79%
BOTZ Global X Robotics & Artificial Intelligence ETF $2.62B 9.40% 0.03% 36 0.68%
FINX Global X FinTech ETF $1.34B 6.27% 0.20% 56 0.68%

 

There appears to be a trade-off for either strategy. The single-theme ETFs have more assets under management and an average spread of 0.07%, meaning they’re more liquid. The multitheme ETFs tend to have fewer assets and have a wider spread of 0.17%.

However, the single-theme ETFs are producing an average return of 4% this year, while the diversified theme funds are producing returns of 8.83%.

Concentrated thematics may be a useful tool for traders, but for a buy-and-hold investor, the higher returns of the broader thematic funds is likely more desirable.

Caveat: Active Vs. Passive

The returns of the funds we’ve looked at so far are heavily weighted toward passive vehicles, so it’s fair to try and compare active thematic funds against their counterparts that track bespoke indexes.

In this case, we’ll put the five largest ARK ETFs (and some of the most popular thematic funds on the market today) against passive funds with the same theme and comparable asset sizes.

 

Theme Active ETF YTD Return 2020 Return Passive ETF 2021 YTD 2020 Return
Broad ARKK -1.98% 152.80% KOMP 10.44% 61.30%
Genomics ARKG -11.19% 180.60% IDNA 16.97% 14.80%
Connectivity/Internet ARKW 1.54% 157.50% SNSR 19.49% 35.00%
Fintech ARKF 7.93% 108.00% FINX 9.68% 53.80%
Robotics/AI ARKQ 9.56% 107.20% BOTZ 11.25% 51.90%
Average   1.17% 141.22%   13.57% 43.36%

 

While the ARK returns are almost 12 times smaller than their index counterparts this year, those ETFs trounced their competitors last year.

It’s difficult to argue that these two periods are comparable, considering just how much the economy changed in 2020. The COVID-19 pandemic and its effects forced swaths of the population into working, playing and spending the majority of their time at home. Normal life was disrupted, and a rapidly changing structure to society required innovative solutions.

Ultimately, a number of narratives shifted in a way that benefited themes of disruption, and that may be a crucial influence on whether investors buy into the vision that any thematic ETF seeks to capitalize on.

Contact Dan Mika at [email protected], and follow him on Twitter

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