Thematic ETFs have captured the imagination of many UK investors. These popular exchange-traded funds offer passive exposure to thousands of stocks and shares in growth areas like AI, biotechnology, clean energy, cybersecurity and defence.
Themes are often broad in order to gain diversified exposure, but targeted to achieve long-term growth opportunities.
It’s important to stay informed and understand that the potential for returns also comes with risk. This article will give you the tools to identify the thematic ETFs that may be right for your long-term portfolio. We’ll also explore how to avoid short-term trends.
At InvestEngine, our Thematic Collection includes 110 ETFs that aim to offer investors access to the world of tomorrow.
What are thematic ETFs?
Thematic ETFs allow you to invest in the long-term trends shaping our world, from broad sweeping technologies like AI to niches like copper mining.
Rather than tracking a market index like the S&P 500 or FTSE 100, these ETFs will hone in on a specific theme. For example, if you believe AI will be transformative, or you want to support a greener future, there will be a thematic ETF for you.
Since ETFs can hold thousands of stocks, you can invest in what you believe in while staying diversified.
Remember, investing into one thematic ETF won’t automatically make your portfolio well-diversified; they often work best as a smaller part of a wider portfolio.
What is the difference between thematic and sector ETFs?
You may be thinking that thematic and sector ETFs sound similar – so what’s the difference? While they both focus on groups of companies, they take different approaches.
Sector ETFs offer exposure to a specific part of the economy like energy, technology or healthcare. They follow established classification systems like those used in FTSE or MSCI indices and the holdings don’t tend to change too much.
Thematic ETFs cut across sectors by grouping companies around ideas and trends, regardless of the industry they’re officially in. For example, an AI-themed ETF might include chipmakers (tech), robotics firms (industrial), and data centres (real estate).
As a result, thematic ETFs are often considered to be more dynamic, with the potential for larger returns, but are more difficult to classify and more volatile.
Why should you invest thematically?
Thematic investing gives you exposure to companies that could benefit from sweeping long-term developments. These shifts (sometimes called megatrends) can often play out over decades.
Unlike traditional investing, which might focus on sectors or countries, thematic investing looks across industries and borders to find companies aligned with a theme.
Because they often include early-stage or fast-growing firms, thematic ETFs can offer high growth potential, but they also tend to carry more risk. These investments suit long-term investors, who are comfortable with short-term ups and downs.
What are some popular thematic trends?
Let’s take a closer look at three major themes attracting investor attention:
- Artificial intelligence (AI)
AI can power everything from virtual assistants to self-driving cars. Investors might be particularly interested as AI spending is expected to grow by 60% this year, according to UBS.
Technology giants like Amazon and Microsoft are heavily invested in AI, while governments are making AI a priority for productivity and innovation.
An AI ETF typically holds chipmakers like Nvidia or AMD, software firms that create AI tools, cloud platforms like Amazon Web Services and data and analytics companies.
- Biotechnology
Biotechnology is all about using living systems to develop products and solutions.
Particularly in healthcare, you’ll find companies that focus on everything from gene editing to personalised medicine. It’s considered one of the most dynamic areas of health and science.
For investors, this might be an interesting trend, as ageing populations drive the demand for new treatments. Genetic research has created breakthrough opportunities, while biotech companies can benefit from development funding and patent cycles.
Biotech ETFs tend to include small and mid-cap drug development companies, large pharmaceutical companies with biotech divisions, as well as medical research and diagnostic companies.
- Clean energy
Clean energy is no longer just about wind turbines and solar panels. It now includes battery technology, hydrogen, electric vehicles, and much more.
As governments aim to meet net-zero targets, investment in renewables is accelerating.
Investors are interested as there is considerable government support through subsidies and green stimulus plans. Energy security is also of political interest and costs for solar, wind and battery storage technologies continue to fall.
Clean energy ETFs can include renewable power producers, battery and storage firms, green infrastructure and utility companies along with hydrogen and fuel cell innovators.
For investors with sustainability goals, clean energy ETFs can offer a way to align values with long-term growth potential.
How to invest in thematic ETFs with InvestEngine
At InvestEngine, we offer access to 110 thematic ETFs including many focuses on themes like AI, biotechnology and clean energy.
With a DIY portfolio, you can add a thematic segment as part of your wider investment strategy. Our platform offers many useful tools to do this, including:
- Commission-free investing – We don’t charge a penny in dealing or platform fees on DIY portfolios (ETF costs apply)
- A choice of over 750 ETFs – Pick ETFs from leading providers like WisdomTree, Vanguard, Invesco and more.
- Effortless automation – Regular investing is a breeze with automated Savings Plans, supported by InvestEngine’s AutoInvest tech.
- Powerful investing tools – Track gains, automate rebalancing and reinvest your dividends
- Available in an ISA, SIPP, GIA or Business Accounts
Things to consider before you invest
Thematic ETFs can be exciting, but it’s important not to be distracted by short-term trends or hype:
- Volatility: Some themes include early-stage companies that can rise and fall sharply.
- Concentration risk: Thematic ETFs may be less diversified than ETFs that follow indices.
- Hype cycles: Popular trends can become overbought, leading to short-term setbacks.
- Long-term view: Some themes may take years to fully play out, so patience is key.
As always, make sure your investment choices align with your long-term goals, how long you’re wanting to stay invested for and how much risk you’re willing to take.
Conclusion
Thematic ETFs offer UK investors a way to back big ideas (like AI, biotechnology and clean energy), without the need to pick individual stocks.
Thematics are a modern way to invest in innovation and look to the future in your portfolio, while ensuring that diversification remains a part of your strategy.
By using low-cost ETFs in a thoughtful, diversified way, you can aim to capture the potential of global trends, all while staying on track to meet your financial goals.
FAQs
- What is a thematic ETF? A thematic ETF is an exchange-traded fund that invests in companies related to a specific long-term trend, such as AI, clean energy, or biotechnology. They cut across industries to focus on a single idea or theme.
- How is thematic investing different from sector investing? Sector investing targets companies within a defined industry (like healthcare or technology), while thematic investing spans multiple sectors. For example, an AI thematic ETF might include firms from tech, healthcare and communications, all linked by their involvement in artificial intelligence.
- Are thematic ETFs risky? Thematic ETFs can be more volatile than traditional index funds because they’re more focussed and may include early-stage or high-growth companies. They’re best suited for investors with a long-term outlook who are comfortable with short-term ups and downs.
- Can I invest in thematic ETFs through InvestEngine? Yes, InvestEngine offers access to 110 thematic ETFs. You can invest through a DIY Portfolio.
- What account types can I use to invest in thematic ETFs? You can invest in thematic ETFs using all major InvestEngine account types: Stocks & Shares ISA (tax-free investing up to £20,000 per year), SIPP (self-invested personal pension with tax relief), GIA (general investment account, no limits) or Business Account (for company investments).
Important information
Capital at risk. The value of your portfolio with InvestEngine can go down as well as up and you may get back less than you invest. ETF costs also apply.
This communication is provided for general information only and should not be construed as advice. If in doubt you may wish to consult a professional adviser for guidance.
Tax treatment depends on personal circumstances and is subject to change, and past performance is not a reliable indicator of future returns.