Thematic exchange traded fund assets in the U.S. have surged from $22 billion in 2015 to over $193 billion today, but not all thematic funds deliver on their promises, according to a new FactSet analysis.
The explosive growth in thematic ETF assets has created challenges for investors trying to separate quality implementations from products with creative marketing, FactSet consultant Stephen Malinak said in the Wednesday report. The analysis offers a framework for identifying true thematic funds and highlights which themes have achieved lasting traction with investors.
Infrastructure funds command the largest share of thematic ETF assets at $29 billion, followed by robotics and artificial intelligence at $22 billion and internet-focused funds also at $22 billion, according to the report. The top 12 thematic niches account for over 90% of total thematic ETF assets under management.
The report distinguishes genuine thematic funds from sector funds by establishing specific criteria, according to FactSet. True thematic funds must support a long-term macro investment trend, draw holdings from multiple sectors rather than subsectors of a single industry, and demonstrate sustained investor interest with at least two funds in the theme and one exceeding $100 million in assets.
Thematic ETF Data Quality Matters
Data quality and index methodology prove critical for building reliable thematic indices, according to the analysis. The report noted a shift away from homegrown indices based on loose narratives toward partnerships with established data and index providers.
Revenue-based business classification offers more precise thematic mapping than headline business descriptions, according to FactSet. The report cited Amazon as an example, noting that 17% of its revenue now comes from web hosting services with another 7% from entertainment content.
Not all themes achieve lasting traction with investors. The report noted that, despite intense enthusiasm in 2021–2022, the metaverse has demonstrated less staying power and several metaverse ETFs have already closed.
Portfolio managers evaluating thematic ETFs should consider thematic purity, efficiency metrics, risk factor exposures, and cross-sectional diversification beyond price performance alone, according to the analysis. The report warns that excessive weighting toward large-cap names with limited thematic exposure dilutes the investment thesis.
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