Benefits and Risks of Thematic ETFs

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Exchange-traded funds occupy more space in the investment world because they offer diversification. You can concentrate that diversification with thematic ETFs. Here we will discuss thematic ETFs, their benefits and drawbacks, and the types of thematic ETFs you can find.

What are Thematic ETFs?

Thematic ETFs are ETFs with a particular focus or theme. Like other ETFs, they are pooled investments that work like mutual funds.

Similar to other stocks, they can be bought and sold on the stock exchange, but a thematic ETF zeros in on something more specific.

Rather than tracking a broader range of assets like an energy ETF, you can purchase a clean energy ETF.

Instead of a technology ETF, you might get a thematic cloud computing fund. A thematic ETF can focus on anything you like based on trends, demographics, or even personal convictions. 

What are the Benefits of Thematic ETFs?

Thematic ETFs offer a number of advantages to investors. Probably the most significant benefits are variety and flexibility.

Because there are so many companies out there, you can pick almost any subject, and a thematic ETF can cover several business ventures.

You can focus on a specific sector and get a basket of stocks rather than having to buy individual stocks.

At the same time, you can get in and out of ETFs as quickly and easily as any other stock.

What are the Risks of Thematic ETFs?

Thematic ETFs carry risk, often more so than other investments. Higher volatility may come into play because of the focused nature of this type of ETF.

A thematic ETF may take you into new or untried territory, and that can make predictability more problematic.

You may have to keep a sharper eye on these ETFs than broader ETFs or more long-term investments.

The cost of investing in an ETF can also be a negative factor. Generally, thematic ETFs are passively managed, so less cost is passed on to you, the investor.

However, the expense ratios can vary a lot, so you must know who runs the show and how much they charge you.

Types of Thematic ETFs

What types of thematic ETFs are out there? Well, what do you like? What do you think is trendy or has a promising future? There are ETFs for almost anything. Here are some examples of general categories and their thematic subsets:

  • Gaming: There are thematic ETFs that concentrate on iGaming or virtual reality gaming and other segments.
  • Sports: You can find ETFs for sporting goods, sports gambling, and, yes, even sports teams.
  • Security: Cybersecurity ETFs are everywhere. Defense security, border security, and robotics are also covered themes.
  • Environment or Climate Change: Look for battery tech, solar energy, wind energy, climate, and sustainable economy ETFs.

We don’t want to sell you on any specific fund; we’ll cover factors to consider further down. But you get the idea of how narrow ETF themes can be, and they are easy to find.

How to Incorporate Thematic ETFs into Your Investment Strategy

It is crucial to research any investment you make. That goes double for thematic ETFs because of the nature of these investments and their potential for volatility.

You must consider that thematic ETFs are only a part of an overall plan you have mapped out to achieve your investing goals. You don’t want to load up your portfolio with any one type of investment.

Here are some tips for investing in thematic ETFs:

Understand the Theme

You want to know what you are getting into. If you have chosen a particular theme, you may think you know a lot about it. But it always helps to delve further into the overall sector and understand your theme’s place in it.

Evaluate the Holdings

You need to take a close look at each of the companies or stocks that your thematic ETF contains.

Know their backgrounds, management, and track record. Newer, unproven companies may expose you to more risk than you would like.

And make sure the companies and the concentration of each holding align with the theme and goals you seek.

Know the Provider

Like a mutual fund, each ETF is managed by someone, and you are looking for a trusted management group with a good track record.

You also need to know the expense ratio of the ETF because fees should be a factor in what you choose. These ratios can vary widely.

Evaluate Performance

Knowing how an ETF has performed in the past can go a long way in helping you make the right decision.

Past performance is not a guaranteed roadmap to what the fund will do in the future. But it should be a factor in your guidance.

See how the ETF has performed over various timeframes. Knowing how the fund has performed under various market conditions will help you assess possible risks.

Check Sector Weightings

Getting a good idea of how much space a sector occupies in the overall market is helpful when deciding the space your investment covers in your portfolio.

The S&P 500 is a good market index to consider for this. Know the general sector your thematic ETF falls under and invest accordingly. 

Spice Your Portfolio with Thematic ETFs

Thematic ETFs are a good way to spice up your portfolio. You can ride a trend in a profitable way, put your money where your convictions are, or make the most of your expertise.

But you have to watch your back as you look forward, and that means solid research and constant vigilance. Check out thematic ETFs, understand the risks, and determine how they can benefit your overall investment strategy.

StockMarketEye allows you to track ETFs, including thematic ones. Get a 14-day trial and see how our software can help you stay on track with all your investments.

Webster Lupton Avatar
Webster Lupton Webster Lupton is a former newspaper writer, editor, and author with experience in trading stocks and general investments. He likes sports, the outdoors, and bird-watching.