Rising Popularity of Thematic ETFs and
Their Market Impact
Thematic ETFs:
Thematic ETFs are exchange-traded funds (ETFs) that concentrate on particular industries,
trends, or themes like technology, sustainability, or developing markets. They provide a way to
invest in themes or trends that align with your interests or investment strategy.
Types of ETFs:
● Technology ETFs: Technology ETFs concentrate on companies that are leading
technological innovation. This can include firms in cybersecurity, artificial intelligence,
blockchain technology, cloud computing, and many other fields of technology.These
ETFs give investors exposure to the rapid advancement of technology, which is often
characterized by high growth potential but also increased volatility.
● Healthcare ETFs:Healthcare ETFs are designed to capitalize on the healthcare sector's
growth and the increasing global demand for health-related products and services.
These ETFs typically invest in companies related to biotechnology, pharmaceuticals,
medical devices, healthcare providers, and healthcare technology. Healthcare ETFs may
also encompass areas like genomics and telemedicine.
● .ESG ETFs:ESG ETFs are designed for investors interested in socially responsible
companies. They aim to include companies in their portfolios that meet specific ESG
criteria, such as sustainable environmental practices, positive social impact, and strong
corporate governance.Note that companies in other ETFs could also double as an ESG-
friendly addition.Clean energy ETFs are a more niche sector of the ESG ETF. They
focus on companies involved in renewable and clean energy sources such as solar,
wind, and hydroelectric power
● Consumer Trend ETFs:Consumer trend ETFs focus on investing in evolving consumer
preferences and behaviors. These ETFs target companies at the forefront of consumer
trends, such as the rise of wellness and healthy living, changing dietary preferences, or
emerging fashion and lifestyle trends. Though they may offer attractive growth potential,
trends come and go, as can the popularity of the underlying companies.
● Emerging market ETFs: Emerging market ETFs offer investors exposure to
undeveloped or underdeveloped economic markets. Such economies are typically
characterized by rapid economic growth and development. These ETFs may cover
regions such as Asia, Latin America, or Africa, providing access to enormous growth
potential. However, they often come with higher risk due to factors such as currency
fluctuations and political instability.
Benefits of Thematic ETFs:
Targeted exposure: Thematic ETFs invest for exposure to specific trends or fields, such as
blockchain or crypto. This can be particularly beneficial for those who strongly believe in the
potential of a certain theme, like robotics or renewable energy.
Diversification: Thematic ETFs typically invest in companies across several sectors of the
economy. This spreads risk and provides diversification despite the emphasis on a specific field,
such as robotics. For example, a thematic ETF for technology may own hardware and software
development companies, start-ups, and blue-chip stocks.
Flexibility: Thematic ETFs trade on an exchange like common stock, meaning investors can
buy or sell shares at any time during the trading day at the market price. Thus, investors,
particularly active traders and those more interested in speculating than in long-term investing,
can react quickly to changes in the market.
Early access: Thematic ETFs provide a more straightforward way to invest in newer and fast-
growing sectors like artificial intelligence, blockchain, or renewable energy. They allow investors
to choose the niche areas that they wish to invest in.
Professional management: Those interested in robotics, ESG-managed firms, or other niche
themes often find it difficult to get up to speed in such specialized areas so that they know
where to invest.
Thematic ETFs are managed by experts who should understand their respective fields well,
including their challenges and where growth can be found. This professional oversight can be a
boon for investors, given the necessity of specialized knowledge.
Risks of Thematic ETFs:
Concentration: While thematic ETFs offer exposure to specific sectors or a trend, this focus
can mean concentration risk. The thematic ETF could suffer significant losses if a particular
theme or sector experiences a downturn.
For example, consider how the different parts of the real estate market may move as a whole.
Investing across a variety of companies may not offer enough diversification to counter broad-
based price movements.
Market timing risks: Predicting the success of the trends focused on by thematic ETFs can be
difficult, and if your (or professional management's) timing is off, you could face significant
losses. In addition, by the time the thematic ETF is created, the market may have already
moved on or matured.
Hype and overvaluation: Investors should be wary of funds that are part of speculative
bubbles in trendy themes that fail to pan out. You must truly understand what a thematic ETF is
invested in. Instead of getting caught up in the hype surrounding an ETF, make sure you
understand specifics, such as the portfolio holdings and their weights.
Liquidity risk: Some thematic ETFs, particularly those focused on niche themes, may not be as
heavily traded as more traditional ETFs. This can result in liquidity risks, where an investor
might find buying or selling shares difficult without affecting the market price.
Rise in popularity of ETFs:
At the end of December 2023, thematic ETFs represented 1.1% of the U.S. ETF industry’s $8.2
trillion total AUM.On a year-over-year basis, Thematic ETF AUM increased +14.6% from $75.5
billion at the end of December 2022.There are 288 thematic ETFs at the end of December
2023.
Effect of ETFs on the market:
To understand about how ETFs work we will learn about ABIDES:
The ETF secondary market, we use the provided ABIDES exchange agent, which operates in a
manner similar to the NASDAQ. The market is open from 09:30 to 16:00, lists any number of
securities for trade, and provides a distinct order book mechanism for each security. The
exchange accepts limit orders of any share volume, and cancellation of same, and transacts
(including partial execution) those orders against a security’s limit order book with a typical
price-then-FIFO matching algorithm. The exchange responds to requests for market hours, last
trade prices, and market depth quote requests, with depth one representing the current best bid
and ask.
After the exchange agent stops accepting orders, the primary market receives the close price of
each underlying symbol in its ETF’s portfolio. The primary market uses these closing prices to
calculate the value of the index and uses this value as the NAV. Then the primary market opens
for basket orders. Every basket order it receives is executed at the NAV, and the agent is
notified of its transaction
We define this model’s market index at time t as the sum of the price of a bundle of stocks:
We based our market index off the DJIA, which is a US stock market index that tracks 30 large
market capitalization stocks. However, our index is simpler than the DJIA, which sums the
prices of these 30 stocks and divides by the DJIA divisor. Our market index calculation
simplifies the basket orders in the ETF primary market, because one share of the ETF is
equivalent to a basket of one share of each symbol in its portfolio.
Some of the ways that market is impacted by ETFs are:
Market liquidity
ETFs provide market liquidity for their shares, which helps ensure their price tracks the net
asset value of the underlying assets.
Arbitrage
The arbitrage mechanism helps ensure that ETF prices track their net asset value. When
demand for an ETF is high, its price may rise above its net asset value, which encourages
arbitrageurs to buy creation units and sell ETF shares. This reduces the price per share.
Risk transmission
The type of ETF can impact risk transmission in the market. For example, during the
COVID-19 pandemic, S&P 500, AI and robotics, and fintech sector ETFs were the primary
risk transmitters.
Financial stability
Some say that a reduction in the role of active players in asset management can lead to a
disconnect between a firm's fundamentals and its share prices. This could affect financial
stability.
Conclusion:
In conclusion, Exchange Traded Funds (ETFs) are a smart tool for investors. They are a way
to invest your money that makes things easier. With ETFs, you can spread your money across
different things, such as stocks or bonds, by buying one thing.
Hyperlinks:
● https://www.nism.ac.in/2023/10/extended-traded-funds/#:~:text=In%20conclusion%2C
%20Exchange%20Traded%20Funds,bonds%2C%20by%20buying%20one%20thing.
● https://www.globalxetfs.com/monthly-thematic-etf-commentary-9/#:~:text=On%20a
%20year%2Dover%2Dyear,five%20additions%20and%20four%20closures.
● https://www.investopedia.com/investing/benefits-and-risks-thematic-etfs/
#:~:text=Thematic%20ETFs%20are%20exchange%2Dtraded,your%20interests%20or
%20investment%20strategy.
● https://www.jpmorgan.com/content/dam/jpm/cib/complex/content/technology/ai-research-publications/pdf-
5.pdf
