What Is A Thematic ETF?

If you’re careful, ETF investing might be the easiest way to invest in stocks. In today’s Juice we pick up where we left off last week when we illustrated one way to construct a broad dividend stock portfolio using exchange-traded funds. By the end of this newsletter, you’ll know more than your peers about one of the hottest types of ETFs and how to thoughtfully consider them as potential additions to your portfolio. 

The ETF Industry Is Booming

Thanks, in part, to their popularity with financial advisors, American and European ETF assets have grown 16% annually since 2016, according to Oliver Wyman, a consultant firm that keeps track of such things. 

• By 2027, ETFs will account for 24% of total assets under management. 
• Actively-managed ETFs accounted for more than 70% of new ETF launches in the U.S. over the last seven years. 

As we noted the other day, active ETFs often roll like this:

… the fund manager selects stock they think will perform well based on their knowledge, market conditions and developments in individual stocks. The manager does this around a theme.

One of the fastest growing ETF types are thematic ETFs. 

Thematic ETFs can be active, passive or a mix of both. Passive means they look to replicate the results of a stock market index. A mix of both means fund managers have the leeway to make moves that don’t necessarily mirror what’s happening in the index. 

ETFs That Tell A Story

In the Oliver Wyman report, the consultancy credits demand for thematic ETFs to “asset allocators increasingly look(ing) for funds that tell a story and connect with contemporary themes.” This is a nice way to define thematic ETFs outside of the textbook definition that they – duh – invest around a specific theme. 

The proof is in the Trackstar pudding. 

As you can see at the top of this email, the second most searched for Global Equity ETF in our proprietary sentiment indicator is the Global X Robotics & Artificial Intelligence Thematic ETF (BOTZ). Global X puts out an entire slate of Thematic Growth ETFs with marketing such as Think Beyond Ordinary. These ETFs include BOTZ as well as funds focused on everything from the blockchain to video games and Esports to our aging population to cannabis. 

As of mid-2022, there were more than 1,200 thematic ETFs trading globally. And they’re not all from relatively unknown firms such as Global X. 

In 2021, iShares put out the first ever thematic ETF, focused on natural resources in North America. Even bigger names are in on the action. JPMorgan’s JPM Climate Change Solutions ETF (TEMP) is domiciled in Ireland and, according to its marketing, “is an active ETF that combines artificial and human Intelligence to target the optimal thematic exposure to climate change solutions.” 

The Bottom Line: ETFs that invest in and around any theme imaginable. ETFs that invest in AI stocks. ETFs that use AI to select stocks. 

How to make sense of it all?

Like anything else, stick to core investing guidelines and principles. 

On one hand, thematic ETFs can help create a portfolio with broad exposure to a wide variety of stocks, sectors, geographic areas and, now, super-specific themes. This helps take the guesswork out of investing, as you don’t have to do the even harder work of picking individual stocks in ultra-specialized spaces you have less personal experience in or interaction with. 

On the other hand, thematic and active ETFs make it easier to chase the flavor of the day. If you genuinely believe in, say, the AI space as a long-term investment opportunity, a thematic ETF such as BOTZ, can make sense as part of a well-rounded portfolio. If you’re chasing a fad or near-term returns, think long and hard about what you’re doing and why you’re doing it in relation to your long-term goals and objectives. 

Plus, the fees thematic ETFs charge can be steep, relative to passive or strict, broad index-tracking ETFs. Stick with The Juice, as we have an installment planned that builds on the present one to assess ETF fee structures.

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