Thematic exchange-traded funds, or ETFs, allow you to invest in a number of the hottest trends and industries — from blockchain to cloud computing, and clean energy to cybersecurity. Thematic ETFs are an easy way to play a trend rather than trying to pick a winner, allowing you to ride the wave that’s carrying the whole sector.
Here are some thematic ETFs in the market’s hottest industries, including how big they are, their largest positions and how much they’ll cost you to own.
How a thematic ETF works
While ETFs first began as a cheap way to invest in the Standard & Poor’s 500 Index, they’re now a way to buy slices of any “exposure” you want. Looking for a specific country, industry or investing style? It’s a good bet there’s an ETF doing what you’re looking for. For example, new thematic ETFs get you a slice of red-hot industries.
Thematic ETFs allow investors who don’t want to do all the analytical work on individual companies to simply buy the industry. So if you see the potential in cloud computing, you can buy the ETF and get a diversified cross-section of the industry at low expense and hassle.
Most ETFs work by replicating a specific weighted index of stocks, and thematic ETFs are often no different. They’ll buy whatever stock is in the index and weight it accordingly in the portfolio. By buying one share of the ETF you’re buying a stake in all the companies in the fund, gaining quick exposure to the industry and a narrow diversification across the companies there.
For that privilege, you’ll pay the fund manager an expense ratio. That’s a management fee measured as a percentage of the money you have invested in the fund. While the cost is quoted at an annual rate, the fee is deducted almost undetectably each day from the fund’s value.
Thematic ETFs are somewhat more expensive than some of the most popular index ETFs such as those based on the S&P 500. Fees on those popular funds can run less than 0.1 percent per year. In other words, you’ll pay $10 for every $10,000 you have invested in the fund.
While thematic ETF fees may be pricier than these cheap funds, they’re largely in line with the average expense ratio. Typically they’ll charge somewhere between 0.5 and 0.75 percent, meaning you’ll ultimately spend between $50 and $75 each year for every $10,000 invested.
If there’s a downside, the fund could be seriously hurt if something hits the sector or investors decide they don’t like it, and a thematic ETF’s narrow diversification won’t help reduce this risk.
These ETFs often have playful ticker symbols indicating what they are. For example, the symbol for the cloud computing fund is SKYY.
7 popular thematic ETFs
Below are seven popular funds that invest in some of the market’s hottest industries.
1. First Trust Cloud Computing ETF (SKYY)
This index ETF invests in companies that make money in cloud computing, a sector of the market that supplies on-demand services via the internet, such as data storage or computing power. The ETF has enjoyed a 24 percent annualized return in the previous five years, as of Aug. 31, 2020. The fund caps the position size of each stock to 4.5 percent of total assets.
Top 5 holdings: Oracle, VMWare, Alibaba, Kingsoft Cloud, Microsoft
Net assets: $4.8 billion (as of Sept. 23, 2020)
Expense ratio: 0.60 percent
2. ARK Innovation ETF (ARKK)
This actively managed ETF invests in what the fund manager calls disruptive innovation, new products or services that could dramatically shift how the world works. Investments include genomics stocks, energy and automation technologies, shared infrastructure and services as well as fintech innovators. Over the five years to June 30, 2020, the stock returned more than 29 percent annually to investors.
Top 5 holdings: Tesla, Invitae, Square, Roku, CRISPR Therapeutics
Net assets: $4.8 billion (as of June 30, 2020)
Expense ratio: 0.75 percent
3. Global X Robotics & Artificial Intelligence ETF (BOTZ)
This index ETF invests in companies that could benefit from the proliferation of robotics and artificial intelligence, including such products as industrial robots and automation as well as autonomous driving. The fund tracks the Indxx Global Robotics & Artificial Intelligence Index. As of Aug. 31, 2020, the ETF has returned about 17 percent annual since its inception in September 2016.
Top 5 holdings: Nvidia, ABB, Intuitive Surgical, Fanuc, Keyence
Net assets: $1.7 billion (as of Sept. 23, 2020)
Expense ratio: 0.68 percent
4. First Trust NASDAQ Cybersecurity ETF (CIBR)
This fund’s ticker symbol indicates what it invests in – cybersecurity companies – and it tracks the Nasdaq CTA Cybersecurity Index. More specifically, it owns cybersecurity companies in the technology and industrial sectors, including those protecting networks, computers and mobile devices. As of Aug. 31, 2020, the fund returned about 16 percent annually over the last five years.
Top 5 holdings: CrowdStrike, Okta, Accenture, Zscaler, Cisco Systems
Net assets: $2.1 billion (as of Sept. 23, 2020)
Expense ratio: 0.60 percent
5. iShares Global Clean Energy ETF (ICLN)
This fund is sponsored by BlackRock, one of the world’s largest fund companies, and it tracks an index of global clean energy companies, including those involved with solar, wind and other renewable sources. As of June 30, 2020, the fund returned nearly 5 percent annually over the previous five years. Over the last three years, returns were more than 15 percent each year.
Top 5 holdings: Sunrun, Plug Power, Xinyi Solar, Solaredge Technologies, Enphase Energy
Net assets: $1.4 billion (as of Sept. 23, 2020)
Expense ratio: 0.46 percent
6. ARK Genomic Revolution ETF (ARKG)
Medical technology is one of the most exciting industries, and this actively managed fund is looking for those companies that can extend and improve human life through technological and scientific breakthroughs, and include those working with gene editing, stem cells and targeted therapeutics. As of June 30, 2020, the fund returned more than 19 percent annually to investors.
Top 5 holdings: Invitae, CRISPR Therapeutics, Pacific Biosciences of California, Compugen, Arcturus Therapeutics
Net assets: $1.3 billion (as of June 30, 2020)
Expense ratio: 0.75 percent
7. Amplify Transformational Data Sharing ETF (BLOK)
Like its name suggests, this actively managed ETF invests in companies that develop and use blockchain technologies, the process behind cryptocurrency such as Bitcoin. The fund is relatively new, having been founded in January 2018, and so it’s also relatively small. As of Aug. 31, 2020, the fund returned almost 11 percent annually, including 44 percent over the last year.
Top 5 holdings: Square, Z Holdings, GMO Internet, Kakao, SBI Holdings
Net assets: $118 million
Expense ratio: 0.7 percent
From low costs to instant diversification to the ability to invest in a hot sector in one click, ETFs offer investors a lot of benefits. However, as you’re investing in these funds, pay attention to their holdings, because some funds won’t always own what their name indicates. You want to get what you’re paying for and not a high-priced fund with the same stocks as every other fund.