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What are thematic ETFs?

Thematic ETFs invest in companies connected to a particular long-term trend — clean energy, robotics, artificial intelligence, cybersecurity, water, an ageing population. Instead of following the market by size, they select companies whose business is expected to benefit from the theme, typically a few dozen to around a hundred.

They are attractive because they make an investment story easy to act on. They are risky for the same reason: by the time a fund exists, the story is often already reflected in the prices of the companies it holds.

How they are built

A thematic index usually defines the eligible companies by how much of their revenue comes from the theme, and then weights them — often equally or with caps on the largest positions — rather than purely by market value. The result is typically concentrated: a single sector or two often make up most of the fund, and its exposure to sector ss is simply the sum of its holdings' weights in that sector:

ws=∑c∈swcw_s = \sum_{c \in s} w_c

A simple illustration

A portfolio holds €40,000 in a world equity ETF and €10,000 in a clean energy ETF. If the theme falls out of favour and the clean energy fund loses 40% while the world ETF falls 5%, the portfolio loses:

40,000×5%+10,000×40%50,000=2,000+4,00050,000=12%\frac{40{,}000 \times 5\% + 10{,}000 \times 40\%}{50{,}000} = \frac{2{,}000 + 4{,}000}{50{,}000} = 12\%

Two thirds of the loss comes from a fifth of the portfolio. Falls of that size are not hypothetical: several clean energy ETFs lost more than half of their value between early 2021 and 2023.

What to keep in mind

  • Concentration. Few holdings, often in one sector and a handful of countries, and high volatility.
  • Timing. Money flows into themes after strong performance, and many funds are launched near a peak. Research on specialized ETFs has found that, on average, they underperformed the broad market in the years after their launch.
  • Costs. Running costs are typically higher than for broad index funds, often 0.4–0.7% a year.
  • Overlap. The large companies in many technology themes are already top holdings of world ETFs.
  • The winners may be elsewhere. A trend can transform the economy while the companies in the fund fail to profit from it, because competition drives down their margins or because the benefits go to their customers.

Where a thematic ETF is used at all, it usually works best as a small position next to a broad core, sized so that a large fall stays bearable.

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