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What are Thematic ETFs? Investing Explained

What is it about ?  : A thematic ETF is designed to benefit from a change in a broad

INVESTING EXPLAINED: What you need to know about thematic ETFs – exchange-traded funds designed to take advantage of the general ‘mega-theme’ shift

In this series, we break the jargon and explain a popular investing term or topic. Here it is: thematic ETFs.

What are they?

ETF stands for Exchange Traded Funds, supposedly because investors can buy or sell at any time. Other funds trade only once per day.

A thematic ETF is designed to benefit from a change in a broad “mega-theme” such as big data, fintech, mobility or robotics.

They could also choose a narrower theme. Within the robotics mega-theme, for example, are topics such as artificial intelligence (AI) and drones.

No matter which mega-theme you choose, there’s a wide variety of backgrounds available, from medical cannabis to pet care.

How do they work?

Managers do not pick individual stocks. Instead, they take a passive approach, following a specially constructed cue.

Companies are weighted, in some cases, by market value, so larger companies make up a larger portion of the index. But the largest weights can also be assigned to companies that derive the most revenue from the theme.

Does AI have a role?

Yes. For example, JP Morgan Asset Management has its own system – Themebot – which helps its managers cover 13,000 companies around the world, narrowing potential opportunities.

Themebot has been used for its Climate Change Solutions ETF, which was launched last year in Britain.

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What about fees?

ETFs have much lower annual management fees than active funds where managers pick stocks. Charges can be 0.05% compared to 0.50% to 1% for an active fund. But thematic ETFs are more expensive.

How big are the risks?

There is a risk of over-concentration in one area – sometimes an area that has also been over-hyped. As a result, investors can buy at the top. Since most ETFs are technology-focused, they have been affected by rising interest rates, although some are starting to rebound.

What are the well-known funds?

Around $79 billion is invested worldwide in this type of ETF. But the best known – and most controversial – is the $7.3 billion ARK Innovation ETF managed by Cathie Wood, one of America’s most watched managers.

In 2022, the fund’s value fell by two-thirds due to its stakes in TV streaming company Roku and Tesla, sparking a firestorm of criticism over Wood’s strategy. But the fund is up 36% in the past month. Wall Street is eager to see what happens next.

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You interest me…

Thematic ETFs can be a way to invest in something you’re passionate about, like clean energy or electric vehicles.

But the advice is that these funds should only form a small part of a portfolio, unless you have deep pockets.

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