Exchange-traded funds, or ETFs, have changed the way many people invest. A normal ETF can give an investor access to a large part of a market through one product. Instead of buying many stocks one by one, an investor can buy one ETF and own a small part of many companies.
Thematic ETFs take this idea a step further. They focus on one clear idea, trend, or area of the economy. Examples include artificial intelligence, robotics, cyber security, clean energy, space, defense technology, and the needs of an aging population.
This has made thematic ETFs very popular. The global thematic fund market reached about $779 billion by the third quarter of 2025. That was more than twice its size five years earlier.
At first glance, this looks like a major product success. Investors can now access a specific part of the economy with one simple trade. But there is another side to the story. A thematic ETF may contain many stocks, yet it can still expose an investor to a small group of similar risks.
This leads to an important question: are thematic ETFs true product innovation, or are they simply a new way to package concentrated bets?
What Makes a Thematic ETF Different?
A normal market ETF often answers a simple question: what market do you want to own?
An investor may choose a broad US stock ETF, an emerging market ETF, or a bond ETF. The goal is usually broad exposure to a market.
A thematic ETF asks a different question: what economic idea do you want to own?
An investor may believe that artificial intelligence will change many industries. Another person may expect strong demand for cyber security. Someone else may believe that robotics will become more important in factories and daily life.
A thematic ETF puts several companies linked to that idea into one fund.
This is useful because it removes the need to pick one company. If an investor wants exposure to AI, they do not have to decide which single AI company will succeed. The ETF can hold a group of firms that may benefit from the trend.
That is a real form of product innovation.
An ETF Does Not Always Mean Broad Diversification
The word ETF can create a sense of safety. Many people see an ETF as a diversified product. That can be true for a broad market ETF, but it is not always true for a thematic ETF.
Imagine an AI ETF with 40 companies. On paper, owning 40 stocks looks much safer than owning one stock.
But what if most of those companies are large technology firms? What if several of them are chip makers? What if the same companies already form a large part of a broad US stock index?
The investor may own 40 stocks, but many of those stocks may react to the same economic factors.
This means an ETF can reduce the risk of one company, while it still leaves the investor with strong exposure to one theme, one sector, or one type of stock.
The key point is simple: a basket of stocks does not always mean a basket of different risks.
One Theme Can Appear in Many ETFs
There is another issue that can be easy to miss.
An investor may buy an AI ETF, a semiconductor ETF, a robotics ETF, and a cloud computing ETF. These may look like four separate investments.
But the same large technology companies may appear in several of them.
As a result, the investor may believe they have four different bets when they really have a few related bets.
This overlap matters because a sharp fall in one part of the technology market can affect several ETFs at the same time.
Not every thematic ETF has this problem. Morningstar research has found large differences between themes. Its recent work also found relatively low movement between some themes after broad market effects were removed. Some pairs of themes had almost no common holdings.
So the word “thematic” does not automatically mean “highly concentrated.” The actual fund structure matters.
The Risk of Buying a Popular Story
The other major concern is investor behavior.
A theme often becomes attractive after its companies have already had strong price growth. When investors see a powerful story and large past gains, they may rush to buy.
The problem is that a strong past return does not guarantee a strong future return.
Thematic funds saw a huge boom during 2020 and 2021. Global thematic assets grew by 175% between 2020 and 2021. They then fell by 45% over the next two years.
By the third quarter of 2025, thematic assets had recovered to $779 billion.
This pattern shows how quickly investor interest can change. A popular idea can attract large amounts of money during a period of strong market performance. Later, when prices fall or expectations change, investors can leave just as quickly.
Fund Returns and Investor Returns Are Not the Same
There is an important difference between the return of an ETF and the return earned by the people who buy that ETF.
Suppose a fund rises sharply over two years. Many investors may notice the strong result and buy after the rise. If the fund then falls, those new investors can suffer large losses.
The fund’s long-term return may still look reasonable, but the actual return for people who bought at different times can be much lower.
Morningstar research has found large gaps between fund returns and investor returns in thematic ETFs. Its research links much of this difference to a simple habit: investors often buy after strong performance and sell after weak performance.
This creates a difficult cycle. A good story attracts attention. Attention brings new money. New money can push prices higher. Higher prices make the story look even better. Then, if expectations fail, prices can fall sharply.
Thematic ETFs Have Also Shown Wide Results
Recent data shows how different the results can be across themes.
Morningstar reported that the typical thematic ETF gained 27.8% in 2025. At the same time, five-year annual returns across thematic categories showed a very wide range.
This tells us that there is no single result for “thematic ETFs.” One theme can perform very differently from another.
Even within one theme, results can depend on the companies in the fund, the fund’s rules, its costs, and the price investors paid when they entered.
The theme itself is therefore only part of the story.
The Theme May Hide the Real Risk
An investor may say, “I am buying AI.”
But the actual investment may include several different exposures at once.
The investor could be buying AI, US large-cap growth stocks, semiconductor companies, high-value stocks, momentum, and technology exposure.
That does not make the ETF bad or good. It simply shows why the label on the fund is not enough.
The fund’s holdings and method deserve close attention. Investors should check how much money sits in the largest holdings, what sectors dominate the fund, and how much overlap exists with ETFs they already own.
Innovation and Concentration Can Exist Together
The debate does not need to have only one answer.
Thematic ETFs are a genuine product innovation because they give investors simple and liquid access to specific economic trends. They can be useful for someone who wants a small part of a portfolio tied to a particular idea.
At the same time, they can package a concentrated market bet in a form that feels more diversified than it really is.
That is the central issue.
The problem is not concentration by itself. An investor can choose concentration on purpose. The bigger problem is hidden concentration that the investor does not fully understand.
What Investors Should Look At
The most useful question is not, “How many stocks does this ETF own?”
A better question is, “What risks do these stocks share?”
An investor should also look at the fund’s largest holdings, sector exposure, valuation, past performance, costs, and overlap with other investments.
Most importantly, the investor should ask what could make the theme fail.
A good story can still produce a poor investment if its expected future growth is already reflected in stock prices.
Conclusion
The rise of thematic ETFs shows how much the ETF market has changed. Investors can now express a clear view about areas such as AI, robotics, clean energy, cyber security, and other long-term trends with one simple product.
That is useful innovation.
But the ETF structure does not remove market risk. It can reduce dependence on one company while leaving strong exposure to one theme or group of related companies.
The best way to understand a thematic ETF is therefore to look beyond its name.
The real question is not whether the ETF contains many stocks. It is whether those stocks expose the investor to many different risks or simply package the same risk in a more convenient form.
The answer can be different for every fund. That is why the label matters less than what the investor actually owns.
ALSO READ: IPO Valuation After Hot August: Are Gains Harder to Repeat?
