Best Ways to Approach Thematic ETFs

It may seem like there’s an ETF for everything. Over the years, ETF issuers have sliced and diced the market to the point where, if you have a certain exposure in mind, you can find it in an ETF wrapper. 

Often that exposure comes in the form of 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 vs. Sector Investing 

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. 

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. 

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 range of thematic ETFs is extremely varied. 

In some ways, 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. 

The ARK Innovation ETF (ARKK), which is currently the largest thematic ETF listed in the U.S. with $9.6 billion in assets under management, has been highly successful in leveraging themes to galvanize investors. 

This is a fund that many investors gravitated toward in 2020 and 2021 when pandemic-fueled lockdowns benefited many of the stocks within ARKK’s portfolio of disruptive companies. Performance aside, 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. 

Themes also allow issuers to zero in on niche trends within each sector. For example, ARK’s ETFs cover a range of sectors like robotics, genomics, fintech, space exploration and 3D printing, among others. 

These futuristic-sounding themes have captured investors’ imaginations, enabling ARK to accumulate billions of dollars of assets. Since 2020, ARK’s eight ETFs have had net inflows of more than $29 billion. 

Reasons for Buying 

Investors buy thematic ETFs for all sorts of reasons. They allow for active portfolio management with the benefit of diversification. If you like Amazon because of the boom in e-commerce, then Amplify Online Retail ETF (IBUY) may grab your attention. 

Do you like Nintendo because of the growing demand for gaming? The VanEck Video Gaming and eSports ETF (ESPO) holds a 5% position in the company, along with 25 other stocks with the same theme. 

Sometimes investors will use thematic ETFs to bet on secular trends they see persisting over longer periods of time. At other times, they will use them as a shorter-term strategy. 

For instance, during the pandemic, IBUY was popular among investors who were trying to capture the growth in e-commerce.  

More recently, investors have been fond of the Invesco Solar ETF (TAN), to which they’ve added $321 million over the past month, hoping to capitalize on the climate bill. 

There are currently 298 U.S.-listed thematic ETFs, 273 of them that aren’t leveraged or inverse funds, according to data compiled by ETF.com. You can 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; for example, Virgin Galactic (SPCE) for space or PayPal (PYPL) for fintech. 

Follow Sumit Roy on Twitter @sumitroy2