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The Pros & Cons of Thematic ETFs

August 26, 2020 · 6 minute read

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The Pros & Cons of Thematic ETFs

When it comes to investing the biggest hurdle can be getting started. But the sooner you begin investing, the sooner you can start making returns on your portfolio towards your financial goals. Investing over an extended period of time can mean you have more time to weather the ups and downs of the stock market.

There are lots of different funds and assets you can put your money into, depending on what you want to get out of the investment strategy, so you’ll want to do your research.

ETFs are a popular tool for building a portfolio, because they allow investors the ability to easily buy into a number of assets with one click. ETFs are popular with DIY investors, with ETFs now making up $5 trillion assets globally .

Thematic ETFs are a subset of ETFs that allow investors to put their money into a specific theme. They could also make sense for your portfolio, if you understand the pros and cons. Before you get started investing, let’s dive in: What is a thematic ETF? How can you incorporate thematic ETFs into your investing strategy and should you?

What Is a Thematic ETF?

An exchange traded fund (ETF) is a basket of securities that gives an investor broad access to different assets, like stocks or bonds or even commodities.

The fund bundles many assets into one product, so when you purchase a share or multiple shares in an ETF it gives you proportional access to everything in that fund. ETFs are very similar to mutual funds, but because ETFs are traded on an exchange they can be bought or sold at any time of day.

This flexibility is one of the benefits of ETFs, along with the ability to diversify easily and at a low cost.

There are many different kinds of ETFs, though the majority of funds globally are invested in plain-vanilla, very low-cost ones that track the well-known market indexes, like the S&P 500 or Financial Times Stock Exchange (FTSE) Emerging Markets.

A thematic ETF is an ETF where all the assets are focused on a theme rather than being tied to a broad market index or to a specific asset class. Those themes can range from “biblically responsible” ETFs to ETFs that focus on the booming marijuana industry.

This generally means all the assets in that fund are invested in that theme—mostly they’re stocks in companies that comply with the theme, but it could be any kind of asset that meets the requirements of the thematic fund.

These requirements can sometimes be quite broad and vague, it can be beneficial for investors to read the ETF’s prospectus to make sure they know what they’re getting. Like with traditional ETFs, when you buy a share into the fund, you’re buying a proportional share into all the assets.

Thematic ETFs have grown in popularity in the last seven years. According to ETFGI , which collects data on funds, in 2012 there were just 183 thematic ETFs available with just $41.4 billion in assets worldwide. At the end of 2016, the last time data was collected, that had risen to $77.9 billion in assets across 447 thematic ETFs.

There are thematic ETFs, however, for almost any niche or trend you’re looking to invest in. And you can expect the number of available theme ETFs to continue to grow. But does that mean they’re a good investment for you?

Why Would Someone Want to Invest in Thematic ETFs?

Nearly 90% of millennials want their investments to be socially responsible, according to study . That means they want investments that are, for example, environmentally friendly or adhere to certain social causes.

Thematic ETFs offer them that ability, if they want it. This rising interest in socially responsible investing has also led to an increase in socially responsible ETFs.

According to Morningstar , there were 235 mutual funds and thematic ETFs at the end of 2017 which screened their investments for environmental, social, or governance factors.

That’s just one reason someone might want to invest in thematic ETFs. Thematic ETFs also allow regular investors to put their money into specific trends, with the chance for high-risk and high-return, which they might not otherwise have access to.

Pros of Thematic ETFs

There can be benefits to investing in thematic ETFs:

•   Buying a thematic ETF can make it easier to invest in a specific sector or trend. Purchasing an ETF in the health sector, for example, essentially gives you access to a number of companies in a space that appears to be growing, without having to invest in each company individually. If you tried to build your own medical device portfolio, for example, it could be difficult to get access, you might have to meet minimums to invest in each company, and you could have to pay trading or wealth management fees for each individual asset instead of once for the bundle as a whole.
•   Thematic ETFs can also be incredibly specific. Instead of investing in the health industry in a general ETF, there is an option to invest in an ETF that focuses on companies fighting obesity.
•   In addition, if there’s a specific sector, like gaming companies or gold miners, you want to invest in (either for personal reasons or because that sector offers the potential for high returns), then thematic ETFs allow you to invest in just that theme—as opposed to investing across many different sectors and companies. Essentially, you know what you’re getting.

If you want to be actively involved in your investments and you know what sectors you’re interested in, then thematic ETFs can offer a way to easily invest in niches that have the potential for high return, but also likely come with higher risk, too.

Cons of Thematic ETFs

However, there can be downsides of thematic ETFs too. Most importantly, not all thematic ETFs are created equal.

•   Thematic ETFs can be slightly more volatile and higher risk, particularly in trendy niche categories. Many of the most high-profile funds end up closing. According to The Wall Street Journal , about 28% of the US-based thematic ETFs launched before 2012 have now closed and almost 80% of those funds launched in Europe have closed.
•   Part of the reason many of these thematic ETFs end up closing is because it’s hard to know which themes are going to be winners. A lot of trends end up just being fads, but you don’t necessarily know which ones are going to be long-term winners and which aren’t.
•   Even if a general theme is typically a winner, that doesn’t necessarily mean a specific thematic ETF is good and it doesn’t mean that every company the ETF is invested in is a winner. There is also no hard and fast definition for any specific theme, so the lines can be blurred.
•   On average, the costs for thematic ETFs are also slightly higher. Thematic ETFs, on average , cost $5.80 for every $1,000 invested, whereas general market indexed ETFs are around $5 for the same amount of assets. Just like with all other ETFs, you may pay a brokerage fee or commission when you buy or sell a fund, so frequent trading between trendy ETFs could also lead to increased transaction costs which weigh on returns.

How Do You Know Which Thematic ETFs to Pick?

If you want to invest in thematic ETFs, then you likely want to spend some time looking under the hood and getting to know the details of each of the funds. You may also need to do more research into the specific companies the ETF is invested in.

Timely themes, which might tap into a booming market, often start out strong but may drop off (and fast).

Typically, the ETF that lands on the market first can have a big first-mover advantage—and end up being the go-to ETF in that theme.

Investors often want to consider the costs of the fund and what kinds of returns it’s had in the past, which while not a good predictor of future performance, may provide a sense of the ETF’s volatility (e.g. how much it could be up or down in any given month or year).

However, some evidence suggests that investors who put money into thematic ETFs don’t get scared off by low returns as quickly as other investors.

That’s because people who believe in a specific theme or are interested in that theme for ethical reasons appear more likely to keep investing in thematic ETFs even when they’re losing.

The right ETF for you is likely the one that helps you meet your financial goals and matches your values and risk tolerance.

ETF Investing with SoFi

If you’re going to get started investing, it’s important to understand risk and risk tolerance. Often, but not always, the higher the risk, the higher the likely returns. Low-risk investments often have lower but steady returns.

How much risk you should take depends on factors including your financial goals and where you’re at in your career. As you age and your goals change, so should your investment strategy.

Thematic ETFs that follow trendy market sectors can sometimes be higher risk. But you can also manage risk by diversifying your portfolio and by having investments across many different asset classes and markets.
SoFi Invest® allows investors no-fee access to stocks and ETFs and has the tools to help you learn about the markets.

Automated investing portfolios are also available if you want a more hands-off approach. They both come with access to real live human advisors, should you need help planning for the future.

Maybe the biggest question to ask yourself is if you want to be actively involved in investing or if you want to set up an account and forget about it. SoFi offers both: active investing and automated investing.
That means if you want to trade ETFs in different sectors or around certain themes, you can do it yourself without paying transaction fees.

You’ll also get real-time investing news and a personal watchlist with data of stocks you care about. And, you can also set up a diversified portfolio that minimizes risk across a range of ETFs and will automatically rebalance when necessary.

If you’re ready to start investing, talk to a SoFi advisor and learn more about SoFi Invest.

External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.


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