The New Bandwagon: “Thematic ETFs”

Yuanli Chagan & Tyron Hay

Why do I keep hearing about thematic ETFs?

The rise of Exchange Traded Funds has been one of the most revolutionary developments in financial history, and one major advancement in this space was the introduction of the thematic or rules based ETF.

This ETF product has allowed investors to move away from the broad exposure of index ETFs, providing retail investors with the opportunity to wager on trendy market segments. By having a rules based structure instead of tracking an already existing index. This has proven to be a fantastic opportunity for retail investors to explore different investing opportunities, and focus their portfolios without investing in individual stocks.

In the early 2000s iShares debuted their first factor based ETF, which was centred around rules based approaches to ETF composition. This industry has now developed to the extent that investors poured $42.6bn into these niche funds in the first two months of 2021. The momentum of these market niche ETFs isn’t stopping too, with 80% of ETF investors planning to continue to invest in them throughout 2021. 

Reasons why you would choose thematic ETFs:

When do investors want to use a Thematic ETF instead of a regular index ETF?

  1. Capitalising on trends: Since Thematic ETF are based on themes or sectors. Allowing investors to capitalise on specific trends or niches.
  2. Convenience: Thematic ETF is a good middle ground between individual stock picking and an index tracking ETF. Where investors still benefit from industry changes without the need to compile individual stocks.
  3. Customisable: Not all investors goals are purely for profit. In recent years we have seen a rise of environmentally friendly Thematic ETFs, allowing investors to invest in portfolios that align with their interest.

The Rise and Rise of Thematic ETFs

This graph demonstrates the significant growth in the global Thematic ETF market, growing 4x in just 10 years, from less than $50bn to a $200bn industry. 

Global Thematic AUM Growth by Region (USD Billion)

The Thematic ETF industry has altered consistently with the change in industries which are hyped at any one time. As of the start of 2020, the Thematic ETF market consisted of the following composition;

Global Thematic AUM by Theme (USD Billion)

This product is trying to capture the unrelenting growth of major technological innovations. Since 2000, the growth in adoption rates of new technologies has been incredibly fast, thus thematics are attempting to gain exposure to these trends prior to 100% adoption. 

Adoption of Technology In The US (1990-2020)

Got to know when to hold them, when to fold them!

A common investing strategy when it comes to thematic ETFs focus on trends rather than individual stock picking or long term diversification. This means that thematic ETFs tend to be short-term focused, where the majority of profits come from initial public interests.

The graph below includes hot 2018 themes such as: 

  • Blockchain
  • Cybersecurity
  • A.I & Robotics
  • Bio-tech
  • Battery tech

Graph of Recent hot trends

As you can see all Thematic ETFs beat out the MSCI world index (orange line) in a short term period supporting the initial public interest argument mentioned above. 

The graph below includes hot 2008 themes such as: 

  • Big tech
  • Rise of China
  • Global water resources
  • Clean energy 
  • Healthcare
  • Urbanisation

Graph of extended hot trends

However, if we extend the time period with Thematic ETFs that was relevant over 10 years ago you can see an initial rise during investor interest and a fall in returns as interest diminishes. With only half beating out the MSCI world index (orange line), where the under performers were China, Clean energy, and Urbanisation. 

We know that in reality China, Clean energy, and Urbanisation is still relevant today. So why did these Thematic ETFs perform poorly? Maybe the ETFs were overpriced during the hype, or the ETFs did not accurately portray the theme. Either way it is important to know what the thematic ETF is actually composed of and the fair price of it as well, not simply follow the crowd.

With this empirical evidence, we can conclude that thematic ETFs are most profitable during periods of investor interest. However thematic ETFs only garner enough attention to be created during periods of heightened interest, this brings to question whether or not thematic ETFs are still relevant by the time they are offered to investors. This leads to the question of whether thematic ETFs are simply overpricing already expensive industries, or whether it simply provides access to the less experienced investor by simplifying the process of trend investing?

You Can Get Screwed In More Ways Than One

In order to compare the fees and fee structure of Thematic ETFs, we will explore an index tracking ETF and a thematic ETF from a number of ETF providers, including Betashares, iShares and Vanguard.

ETF ProviderIndex Tracking ETFFeesThematic ETFFees
BetaSharesA200– Tracking the performance of the 200 largest companies on the ASX.0.07% p.aHACK– World’s leading cybersecurity companies.0.67% p.a
iShares (BlackRock)IVV– S&P 500 ETF tracking the performance of the top 500 U.S stocks.0.04% p.aIXJ– Exposure to pharmaceutical, biotechnology and medical device companies.0.46% p.a
VanguardVAS– Seeks to track the returns of the S&P/ASX 300 index.0.10% p.aVBLD– Global infrastructure securities listed in developed countries. 0.47% p.a
ETF Provider Comparison

The management fees associated with ETFs include all fees related to the operation of these ETFs, which can include accounting and auditing fees, custodian fees and licencing fees. These fees are built into the unit price of the ETF, hence many investors aren’t aware of the true fees they are paying on these ETFs. 

Traditionally the management fees associated with index tracking ETFs are incredibly low, primarily due to the little management required with operating these funds. This contrasts with that of thematic ETFs, whereby weights are determined directly by managers, and stocks will be introduced and removed as managers see necessary. 


Perhaps a bit meta, but there is an ETF centred around social media sentiment of large cap stocks, being VanEck Vectors Social Sentiment ETF (BUZZ).

Commencing on the 2nd of March 2021, this fund currently has 75 holdings across large cap hype stocks, as determined by the BUZZ NextGen AI Index.

This ETF was developed from the ashes of the Gamestop, AMC and Blackberry saga of late January 2021, with one of the key overview points for the fund being;

“Retail investors are a powerful force; they have demonstrated that they have the knowledge to outsmart Wall Street.”

Current management fees are 0.75% p.a.

Top Holdings Include;

Company% Allocation
Rocket Cos3.04%
Advanced Micro Devices3.00%
BUZZ Holdings

What seems clear when it comes to BUZZ is that those major holdings aren’t necessarily those we have been associated with hype and extreme speculation, like Gamestop for instance.

Evidently, many investors are likely being deceived in their purchase of this ETF, to the extent that the index may not hold what these individuals anticipate they are investing in.

“The Green New Deal” in Finance?

Since there has been a rise in consumer demand for sustainability in recent years and institutions have created ESG ETFs. However there has been a big debate whether these ESG ETFs are any different from a board index fund. Take S&P 500 Fossil Fuel Reserves Free ETF (SPYX). 

Top 5 Holdings Include;

Company% Allocation
Alphabet (google)1.89%

Where the only ESG company in the top 10 is Tesla, and the runner-up being ranked 43rd ‘NextEra Energy Inc’ with an allocation of only 0.45% and a basket of 490 stocks. It is questionable whether SPYX is just a modified version of the SPY for marketing purposes. This brings to question whether or not it’s fair to charge 0.25% for SPYX compared to 0.09% for SPY that is a whopping 178% increase in fees. 

Finally the Important Stuff (For Those Smart Enough to Scroll Down)

Though thematic ETFs are great for taking positions on trends, there should always be an exit strategy to ensure that you are not chasing a trend that has long been abandoned by the market. This is evident in the empirical data above, where the “hot industries” of the past are not the same as the “hot industries” now. 

Thematic ETFs are not as developed as index ETFs, therefore the investors need to be wary and do the research. Even if the name of the thematic ETF is exactly the trend you want to encapsulate, the portfolio composition may not accurately reflect that. For example “Buzz” mentioned above was advertised in a way that it was an ETF that would be trying to track the next “gamestop”, but in reality it was just another tech ETF. 

Though thematic ETFs can be a great tool in an investors arsonal, it is still just a tool and like any tool there is a certain amount of research that needs to be done to be used appropriately. As long as you are mindful where thematic ETFs excel and their short-comings they can be a useful tool for your average investor.

Yuanli Chagan is a Research Analyst in UNIT (University of Melbourne), writing primarily on market catalysts and investment opportunities.

Tyron Hay  is a Research Analyst for UNIT (University of Melbourne), writing primarily on recent macroeconomic trends and personal finance developments.


Why do I keep hearing about thematic ETFs?

Growth rates:

Management Fees:


Green ETF

Edited by Samuel Subramaniam

Disclaimer: The views expressed in this article are solely that of the author’s, and do not necessarily reflect the position of UNIT nor the University of Melbourne. The advice given is general in nature and does not consider an individual’s personal financial circumstance. Transacting off this information is done so at one’s own risk, and individuals are encouraged to consult a finance professional before making investment decisions based off of this article.

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