The Advantages Of Thematic ETFs

There’s an ETF for everything. Maybe not in the literal sense, but it sure seems like issuers have sliced and diced the market to the point where, if you have a certain exposure in mind, you can get it in an ETF wrapper.

Often that exposure comes in the form a thematic ETF. Thematic ETFs hold portfolios of securities—mostly stocks—that fit a particular theme.

That theme can be anything, from the airline industry (the U.S. Global Jets ETF: JETS) to cannabis (the ETFMG Alternative Harvest ETF: MJ) to something as narrow as pet care (the ProShares Pet Care ETF: PAWZ).

Theme-Sector Overlap

There is some overlap between investing in themes and investing in more traditional sectors or industries. For instance, about three-quarters of the stocks held by JETS are considered a part of the “Airlines Industry” under the popular Global Industry Classification Standard (GICS).

So, is JETS a sector/industry ETF, or a thematic ETF? You could argue it’s both (though what is or isn’t a theme can be subjective).

Themes are just another way to group stocks together. They’re an alternative, less formal way to do so than more traditional classification schemes, like GICS or the Refinitiv Business Classification (TRBC).

Thematic ETFs tend to be flexible, holding stocks from across multiple sectors and industries. They enable investors to capitalize on discernable trends, such as the legalization of cannabis in the U.S.; the growth of economic activity in space; or the buildout of fifth generation (5G) cellular networks.

The number of potential themes is limitless, so the list of thematic ETFs is extremely varied.

ARK’s Success

Some would argue that thematic ETFs are easier to grasp than sector ETFs. A theme tells a story—like ARK’s disruptive innovation theme—in a way that a sector can’t.

Indeed, ARK has been highly successful in using themes to its advantage. The ARK Innovation ETF (ARKK) is currently the largest thematic ETF listed in the U.S., with $21 billion in assets under management (AUM).

This is a fund that many investors gravitated toward last year when pandemic-fueled lockdowns benefited many of the stocks within ARKK’s portfolio of “disruptors.” In addition to delivering outstanding performance, ARK did a great job selling its story to investors, something made much easier thanks to the company’s lineup of clearly defined thematic ETFs.

ARK’s ETFs hit on areas like robotics, genomics, fintech, space exploration and 3D printing, among others.

These are all futuristic-sounding themes that have captured investors’ imaginations, enabling ARK to accumulate billions of dollars of assets. In 2020, ARK’s five largest ETFs had net inflows of more than $20 billion.

Top Thematic ETFs By AUM

Reasons For Buying

Investors buy thematic ETFs for all sorts of reasons. They allow for active portfolio management with the benefit of diversification. You like Amazon because of the boom in e-commerce? Consider the Amplify Online Retail ETF (IBUY).

You like Activision Blizzard because of the growing demand for gaming? The VanEck Vectors Video Gaming and eSports ETF (ESPO) holds a 5% position in the company, along with 25 other stocks falling under the same theme.

Sometimes investors will use thematic ETFs to bet on secular trends that they see persisting over long periods of time. Other times, they will use them as a way to play shorter-term moves.

For instance, last year, the aforementioned JETS was popular among bargain hunters who were trying to benefit from an expected postpandemic rebound in travel. They added $2.3 billion to the fund over the course of 2020.

This year, investors bought the Global X U.S. Infrastructure Development ETF (PAVE) ahead of the expected passage of a $1 trillion U.S. infrastructure bill, fueling year-to-date inflows of $3.1 billion.

And most recently, investors have been enamored with the tumbling KraneShares CSI China Internet ETF (KWEB), to which they’ve added $3.9 billion year-to-date, hoping to catch a recovery in China’s beaten down internet stocks.

Finding Thematic ETFs

According to ETF.com’s tally, there are currently 206 U.S.-listed thematic ETFs, 188 of them that aren’t leveraged or inverse funds. Browse the Theme Investing channel for a list of all thematic ETFs, or use the ETF.com stock finder tool to search for ETFs that own a particular stock that captures the theme you are interested in (e.g., Virgin Galactic (SPCE) for space or PayPal (PYPL) for fintech).

Email Sumit Roy at [email protected] or follow him on Twitter @sumitroy2