Welcome to another edition of the ETF Insights Newsletter. This month, I’m covering a heavily requested newsletter that focuses on thematic ETFs and whether or not they deserve a spot in your portfolio.
These types of ETFs have skyrocketed in popularity, with assets under management in these funds soaring nearly 1000% over the last ten years. However, is their popularity backed by strong performance? I’ll dive deep.
First, however, I want to announce a change on the website.
I am changing my reports to a web format
I have had a lot of feedback on the structure of the ETF reports, and from what I have gathered, the PDFs are not the best user experience on a mobile device. For this reason, I will be transitioning those reports to a web-based format.
You can see an example of this new format with the Fidelity All-in-One Equity ETF – FEQT.NO.
As always, I appreciate any feedback on these reports as I continually try to improve the platform.
Thematic ETFs – Are they worth your money?
The beauty, and sometimes the detriment, of exchange-traded funds is their flexibility in their construction. Their legal structure makes them more functional than a mutual fund. As a result, we have a wide variety of funds trading today.
Some are outstanding long-term return generators, while others are nothing more than fee-grabbers aimed to extract the maximum amount of fees they can from investors who want to hop on a particular hot trend or market strategy.
Thematic ETFs fall into the latter bucket.
What is a thematic ETF?
A thematic ETF is a fund that focuses on a specific theme in the market. If one wanted exposure to a basket of technology stocks, they might head to a broad NASDAQ index like QQC.
However, let’s say they want to take this a step further and they want to focus on companies that drive most of their revenue from artificial intelligence. This is where we start getting into thematic ETFs. Although most will be technology stock-based, there is the potential for multiple sectors/industries to be inside these thematic ETFs, and they provide more direct exposure to particular sub-niches of the market.
We can narrow this down even further. Let’s say you want exposure to artificial intelligence, but you want to take advantage of the growing popularity of data centers and hardware sales. Global X has a fund for that, called the Big Data & Hardware ETF, trading under the ticker HBGD.
As the popularity of ETFs continues to rise, fund managers are becoming a lot more adept at bringing niche funds to market. As we move forward, I believe we will see many funds released that focus on small segments of the market.
The difficulty with these thematic ETFs
As I mentioned at the start of this newsletter, thematic ETFs are skyrocketing in popularity, going from $9.7B in assets under management in 2014 to over $93B at the end of 2024.
If you’ve paid any attention to the ETF space these days, you probably know that fund managers follow the money. Look no further than the passive income trend over the last few years and the rise of fund issuances that target higher income-generating strategies.
Most members will know my thoughts on these particular funds, whether they be covered calls, split corporations, or single-stock income funds. There are some solid ones, but the vast majority of them are nothing more than fund managers trying to take advantage of retail’s obsession with income and ultimately extract the maximum amount of fees they can.
Thematic ETFs are much the same, and I expect them to get worse in the coming years. There are some strong ones, but there are also a ton that charge high fees for lackluster performance. Fund managers know they can get away with this, as they’re offering a convenient package of equities (or whatever other investments might be in the fund) to a hot industry that has been frequently hitting headlines.
Fund managers are taking advantage of narrative-driven investing
I am not sure we will ever see a better example of thematic ETFs and the destruction of retail investor wealth than Cathie Wood’s ARK Investing funds.
I remember the complete euphoria for Cathie Wood in 2020 and 2021 as retail investors poured into her thematic-based ETFs in droves.
Fast forward a few years later and ARK Investing is one of the largest wealth destroyers for retail investors in history. Although they have numerous thematic ETFs, all of which have underperformed broader market indexes, ARK Innovation, the most popular one during the pandemic, lost retail investors over $7.1B alone.
At its peak, ARKK was generating over $210M in fees. Not bad for a fund that has lost 70% of its value since 2021. Not bad for the fund manager, of course. Absolutely horrible for most people who had a piece of it.
A lot of the inflows to Cathie Wood’s funds were primarily based on narrative-driven investing. But it wasn’t just ARK either.
Back in 2020, Direxion released a Work From Home ETF (WFH) to try and take advantage of the surge in retail investors who wanted exposure to companies that provided services like video conferencing, data, internet, etc.
The narrative at the time was people will never return to the office, it’s much easier to work at home!
However, fast forward to the end of 2024, and 76% of Canadian corporations are mandating returns to the office, while 95% of US companies are demanding some form of office work.
The end result? the WFH ETF has underperformed the S&P 500 by nearly 100% since its inception and, at one point, had drawdowns in excess of 50%.
The fund’s assets under management have fallen by nearly 90%, as the trend is most certainly dead.
I could spend hours going over thematic ETFs that went through the exact same pattern of a surge in popularity and inflows when the trend was hot and a subsequent collapse of assets and share price when the narrative fell out of favor.
Where investors get tripped up with thematic ETFs
Many investors are driven to ETFs due to their hesitancy toward picking individual stocks. They feel that instead of picking an individual stock in a particular narrative-driven investment area, they’re instead reducing their overall risk by purchasing a thematic ETF.
In some cases, I would agree with this strategy. For example, an investor who wants to take advantage of the growing demand for energy, whether it be natural gas or oil.
Purchasing an individual stock in this area can no doubt have you making the wrong decision and realizing lackluster returns. So, many investors will look to a fund like XEG, which is the iShares Energy fund that contains a dozen of the best producers in Canada, as an alternative.
Let’s take, for example, someone who chose Cenovus as their energy holding. It has underperformed XEG by nearly 35% over the last 3 years, primarily due to operational struggles in the previous 12-15 months.
Although I would not classify XEG as a “thematic” ETF, it can be utilized to take advantage of potential moves in the energy market, which is no doubt a market theme.
On the flip side, one looking to take advantage of the work-from-home trend, as discussed above, would not have reduced volatility at all by “diversifying” across holdings with that thematic ETF.
Most thematic ETFs are actively managed funds and poor ones at that. When the narrative is in full swing, these funds are blessed with an influx of assets under management, which ultimately are invested into the underlying holdings, which bloats their valuations.
As a result, you get stocks like Roku, a popular holding in ARKK, trading at a mind-boggling 35x sales during the pandemic. Today? Roku trades at 2.3x sales.
How to spot a poor thematic ETF in just a few seconds
Spotting a poor thematic ETF comes down to spotting the theme yourself and seeing if it is viable.
If you have even the slightest gut feeling that the ETF strategy seems a bit… abnormal, then it probably is.
For instance, the Battleshares Tesla versus Ford ETF. This fund holds a 200% leveraged long position in Tesla, while on the flip side, it holds a short position in Ford.
Effectively, the fund is a narrative-driven ETF that focuses on the fact that EV vehicle users (Tesla in particular) are going to outpace traditional vehicle users (Ford).
The fund gained over $5.5M in assets on launch in February of 2025. That has fallen to $888,000 and the fund is down 52% in a little over a month. At one point, it was down nearly 70% 3 weeks after launching.
For the privilege of losing 52% of your money in a month, you’ve also had to pay a 1.29% annualized fee.
There is now a risk here that the fund simply gets rolled up and closed down due to the lack of AUM. This means investors will never have the chance to recover their capital if Tesla goes on a run.
When looking at a thematic fund, if you have to ask yourself why anyone would ever ask for this, you probably have a quick answer as to whether or not it will be sustainable.
How to identify strong thematic ETFs
Not every fund manager is out there to take advantage of retail investors by offering high-fee products on, let’s just be blatantly honest here, dumb ideas.
There are some strong thematic ETFs out there that target industries that aren’t necessarily narrative-based but fundamental-based.
Let’s take for instance, data center expansion on the back of a surge in AI-development. Horizons Big Data & Hardware ETF (TSE:HBGD) is a fund that looks to take advantage of this.
Where a situation like the work-from-home ETF was built on the hopes and prayers of workers never returning to the office, causing a surge in profitability for the underlying holdings, HBGD was constructed to give investors exposure to a rapidly growing industry that has fundamental growth behind it. After all, look at the chart below highlighting NVIDIA’s data center growth.
We can also look to a few funds featured here at ETF Insights, the Global X Semiconductor ETF (TSE:CHPS) and the iShares Semiconductor ETF (SOXX).
These are thematic ETFs constructed on the long-term expectations of a growing demand for semiconductors based on advancements in technology and the growing demand for artificial intelligence.
When we look to these themes, they make sense from a long-term perspective. When we dive into the strategy of these ETFs, we aren’t left wondering, “who would even want this anyway?”
We can’t really say the same for something like the Tesla vs Ford ETF. In fact, the strategy seems purely speculative and outright ridiculous.
The difficulty with thematic ETFs in Canada
Canada’s market is relatively small. What this leads to is fewer fund managers wanting to roll out a lot of ETFs here. As I mentioned, fund managers are incentivized to go where the money is. In this case, the money certainly isn’t in Canada, it’s in the United States.
There are a few fund managers here in Canada who do a good job of providing Canadians with unique opportunities to invest, like the Bank of Montreal. However, for strong thematic ETFs with large AUM, you will likely need to head south of the border.
A prime example would be one of the funds I just talked about, Global X’s Big Data ETF. Despite being around since 2019, the fund has only $16M in assets under management. On the flip side, their Data Center ETF south of the border (DTCR) has over $235M in AUM.
A result of the lower AUM is higher fees. The higher the AUM of a fund, the lower fees the fund can charge, as it can typically operate the fund efficiently with a smaller management fee. This, in turn, attracts more AUM to the fund and creates a bit of a cycle. For a lot of Canadian ETFs, particularly smaller thematic ones, fees remain quite high, as there is not enough capital in the fund to operate it as efficiently.
Overall, most thematic funds are going to be ones you want to avoid
If you’re looking to take advantage of particular themes or segments of the market, the most important thing to ask yourself is whether or not this theme will be viable in 5 years, 10 years, or even further out.
If there is even the slightest hesitation in that regard, the answer to the question of whether or not to buy in is probably no. For example, it is much easier to gauge the longevity of a semiconductor ETF based on the underlying results of the companies in the industry than judging the longevity of an ETF that focuses on the growing need for pet care (yes, this exists, the ticker is PAWZ).
The majority of thematic ETFs are going to be marketing ploys put out by fund managers to extract the absolute maximum amount of money they can from retail investors by convincing them that a narrative that exists today (and likely won’t in a year or two) is the “next big thing.”
Once you look objectively at a lot of the thematic ETFs out there and their underlying strategies, it doesn’t take a lot of advanced investment knowledge to understand most of them are destined to underperform.
