Which Thematic ETFs are right for you?

Key highlights:

• Thematic ETFs are a type of exchange-traded fund that focuses on specific market themes or trends, such as clean energy, robotics and artificial intelligence, or cybersecurity ETFs. These ETFs can provide investors with targeted exposure to growing industries and disruptive technologies and can be a valuable addition to a diversified investment portfolio.
• While thematic ETFs offer potential benefits, they also come with unique risks. For example, they are often more concentrated than traditional ETFs, which can lead to higher volatility and concentration risk. Additionally, investors should be aware of potential regulatory changes and other external factors that can affect the performance of these ETFs.
• When considering thematic ETFs, it's important to conduct thorough research and due diligence. This includes examining the underlying holdings of the ETF, evaluating the potential risks and returns, and determining how the ETF fits within your overall investment strategy. Thematic ETFs can be a useful tool for investors, but they should be used in conjunction with other types of investments to achieve a well-diversified portfolio.

What is a thematic ETF?

Thematic exchange-traded funds are a type of ETF that invests in companies that are related to a particular theme or trend. Instead of investing in a broad market index or sector, thematic ETFs focus on specific trends, such as clean energy, technology, healthcare, or artificial intelligence.

Thematic ETFs are designed to provide investors with exposure to a specific market theme or trend, allowing them to invest in a diversified portfolio of companies related to that theme. For example, a clean energy ETF might invest in companies that produce solar panels, wind turbines, and other renewable energy technologies. Similarly, a technology ETF might invest in companies that develop software, hardware, or semiconductors.

Investors are attracted to thematic ETFs because they offer the potential for higher returns than traditional index funds, as the companies in these funds are often in high-growth industries. However, investors should also be aware that thematic ETFs may be riskier than traditional index funds because they are often more concentrated in certain sectors or industries.

Is thematic investing a strong investment strategy?

The effectiveness of thematic investing as an investment strategy depends on several factors, such as the chosen theme, the market conditions, and the investor's goals, investment objectives and risk tolerance.

Thematic investing can be a strong investment strategy if the theme is backed by strong macroeconomic trends and has the potential for long-term growth. For example, a thematic ETF that focuses on clean energy may be a good investment if the demand for renewable energy continues to increase and there are favourable government policies in place to support the industry.

However, thematic investing can also be risky because it is more concentrated in a specific sector or theme, which can increase volatility and potential losses if that theme experiences a setback. Additionally, it can be challenging to identify the best thematic investments and to time the market correctly.

10 Thematic ETFs popular on Stake

Data as of 29 March 2023.

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Discover the top thematic ETFs to watch

1. ARK Innovation ETF ($ARKK)

Market capitalisation: US$7.16b

Stock price (as of 29/03/2023): US$37.19

Stake platform bought / sold (1 Jan 2023 - 24 Mar 2023): 60% / 40%

The ARK Innovation ETF focuses on investing in companies that are disruptive innovators across a range of sectors, including healthcare, technology, and industrials. Pros of this theme include exposure to high-growth companies that are leaders in innovation, while cons include concentration risk and high volatility.

2. Global X Lithium & Battery Tech ETF ($LIT)

Market capitalisation: US$3.25b

Stock price (as of 29/03/2023): US$61.26

Stake platform bought / sold (1 Jan 2023 - 24 Mar 2023): 66% / 34%

The Lithium & Battery Tech ETF invests in companies involved in the production and supply of lithium and other battery-related materials. Pros of this theme include exposure to a growing market as demand for electric vehicles and renewable energy storage increases, while cons include concentration risk and exposure to commodity prices.

💡Find out more: Top 10 Lithium Stocks on ASX→

3. Invesco Solar ETF ($TAN)

Market capitalisation: US$2.25b

Stock price (as of 29/03/2023): US$72.56

Stake platform bought / sold (1 Jan 2023 - 24 Mar 2023): 50% / 50%

The Invesco Solar ETF invests in companies involved in the solar energy industry, including manufacturers of solar panels and developers of solar power plants. Pros of this theme include exposure to a growing industry as demand for renewable energy sources increases, while cons include concentration risk and exposure to regulatory changes.

4. VanEck Vectors Video Gaming and eSports ETF ($ESPO)

Market capitalisation: US$283.55m

Stock price (as of 29/03/2023): US$51.45

Stake platform bought / sold (1 Jan 2023 - 24 Mar 2023): 29% / 71%

The Video Gaming and Esports ETF invests in companies involved in the video gaming and esports industry, including game developers and esports event organisers. Pros of this theme include exposure to a growing market as gaming and esports continue to gain popularity, while cons include concentration risk and exposure to regulatory changes.

5. iShares U.S. Home Construction ETF ($ITB)

Market capitalisation: US$1.54b

Stock price (as of 29/03/2023): US$68.05

Stake platform bought / sold (1 Jan 2023 - 24 Mar 2023): Not available

The iShares U.S. Home Construction ETF invests in companies involved in the construction and homebuilding industry, including homebuilders, building product manufacturers, and home improvement retailers. Pros of this theme include exposure to a growing industry as demand for housing increases, while cons include concentration risk and exposure to interest rate changes.

6. VanEck Vectors Environmental Services ETF ($EVX)

Market capitalisation: US$68.43m

Stock price (as of 29/03/2023): US$139.63

Stake platform bought / sold (1 Jan 2023 - 24 Mar 2023): Not available

This Environmental Services ETF invests in companies involved in the environmental services industry, including waste management and pollution control companies. Pros of this theme include exposure to a growing industry as demand for environmental solutions increases, while cons include concentration risk and exposure to regulatory changes.

7. Global X Robotics & Artificial Intelligence ETF ($BOTZ)

Market capitalisation: US$1.65b

Stock price (as of 29/03/2023): US$24.36

Stake platform bought / sold (1 Jan 2023 - 24 Mar 2023): 83% / 17%

The Robotics & Artificial Intelligence ETF invests in companies involved in the robotics and artificial intelligence industry, including developers of automation technology and industrial robots. Pros of this theme include exposure to a growing industry as automation continues to increase in popularity, while cons include concentration risk and exposure to regulatory changes.

💡Find out more: Top 10 Artificial Intelligence Stocks on ASX→

8. iShares Cybersecurity and Tech ETF($IHAK)

Market capitalisation: US$481.28m

Stock price (as of 29/03/2023): US$34.84

Stake platform bought / sold (1 Jan 2023 - 24 Mar 2023): Not available

The Cybersecurity and Tech ETF invests in companies involved in the cybersecurity industry, including developers of cybersecurity software and providers of secure cloud services. Pros of this theme include exposure to a growing industry as cybersecurity threats continue to rise, while cons include concentration risk and exposure to technological changes.

9. Global X Cloud Computing ETF ($CLOU)

Market capitalisation: US$550.41m

Stock price (as of 29/03/2023): US$17.13

Stake platform bought / sold (1 Jan 2023 - 24 Mar 2023): Not available

The Global X Cloud Computing ETF invests in companies involved in the cloud computing industry, including providers of cloud infrastructure and software. Pros of this theme include exposure to a growing industry as cloud computing becomes more popular, while cons include concentration risk and exposure to technological changes.

10. First Trust NASDAQ Clean Edge Green Energy Index Fund ($QCLN)

Market capitalisation: US$1.57b

Stock price (as of 29/03/2023): US$48.79

Stake platform bought / sold (1 Jan 2023 - 24 Mar 2023): 61% / 39%

The Clean Edge Green Energy Index Fund invests in companies involved in the clean energy industry, including producers of solar and wind power, as well as companies that produce hybrid and electric vehicles. Pros of this theme include exposure to a growing industry as demand for renewable energy sources increases due to climate change, while cons include concentration risk and exposure to regulatory changes.

Advantage of thematic ETFs

Thematic ETFs have several advantages that make them an attractive investment option for investors:

• Exposure to a particular theme: Thematic ETFs provide investors with exposure to a specific market theme or trend, allowing them to invest in a diversified portfolio of companies related to that theme. This allows investors to invest in a specific area of the market that they believe has long-term growth potential.
• Diversification: Thematic ETFs typically invest in multiple companies within a particular theme, providing investors with a degree of diversification within that theme. This can help to reduce the risk of individual company failures impacting the overall investment returns.
• Easy to invest: Thematic ETFs are traded on stock exchanges, making them easy to buy and sell like individual stocks. This allows investors to easily incorporate them into their investment portfolio.
• Lower costs: Thematic ETFs generally have lower management fees compared to actively managed mutual funds, making them a cost-effective investment option.
• Potential for high returns: Thematic ETFs are designed to invest in high-growth industries or sectors, providing investors with the potential for higher returns than traditional index funds.

🎓 Learn more: Growth investing: The complete guide for beginners→

Risks of investing in thematic ETFs

While thematic ETFs have several advantages, they also come with some risks that investors should be aware of before investing:

• Concentration risk: Thematic ETFs invest in a specific theme or sector, which can increase concentration risk compared to a broad market index. If the theme or sector performs poorly, it can result in significant losses for investors.
• Volatility: Thematic ETFs can be more volatile than broader market ETFs because they are more narrowly focused. This can result in higher fluctuations in price, which can be unsettling for some investors.
• Limited diversification: While thematic ETFs do provide some degree of diversification within a specific theme, they may not be diversified across other themes or sectors. This can increase the risk of losses if the specific theme or sector performs poorly.
• Market risk: Thematic ETFs are subject to market risk, which means that if the broader market experiences a downturn, the ETFs will likely experience a similar decline in value.
• Liquidity risk: Some thematic ETFs may be less liquid than other ETFs or individual stocks, which can result in difficulty buying or selling the ETFs at the desired price.
• Newness risk: Some thematic ETFs may be relatively new or untested, and their track record may not be well-established. This can make it difficult for investors to assess their performance and risk profile.

Are thematic ETFs a good investment?

Whether thematic ETFs are a good investment depends on several factors, such as the chosen theme, the investor's goals and risk tolerance, and the market conditions. Here are some points to consider:

• Suitability: Thematic ETFs can be a good investment for investors who are looking to invest in a specific market theme or trend, and who have a long-term investment horizon. However, they may not be suitable for all investors, particularly those with low-risk tolerance.
• Diversification: Thematic ETFs can provide some diversification within a specific theme, but they may not be diversified across other themes or sectors. This can increase the risk of losses if the specific theme or sector performs poorly.
• Returns: Thematic ETFs can provide the potential for higher returns than traditional index funds, as the companies in these funds are often in high-growth industries. However, this potential for higher returns comes with greater risk and volatility.
• Costs: Thematic ETFs generally have lower management fees compared to actively managed mutual funds, but they are often more expensive than ETFs that invest in a broad market index.
• Risks: Thematic ETFs can be risky because they are often more concentrated in certain sectors or industries, and if the theme experiences a setback, it can result in significant losses for investors.

In summary, whether thematic ETFs are a good investment depends on various factors, and investors should carefully consider the potential risks and returns before investing in them, as all investing involves risk. As with any investment, diversification is essential, and investors should consider incorporating thematic ETFs as part of a well-diversified investment portfolio.

This does not constitute financial product advice nor a recommendation to invest in the securities listed. Past performance is not a reliable indicator of future performance. As always, do your own research and consider seeking appropriate financial or taxation advice before investing.