Thematic ETFs: what they are, how they work and why they attract investors

Investing can involve exploring a wide range of funds, tickers and strategies. Among the many categories available in the market, one that has gained increasing attention in recent years, is Thematic ETFs (Exchange Traded Funds).

 

Below, we explain what these ETFs are, how they work and why they have attracted growing interest from investors.

 

What is an ETF?

An ETF (Exchange Traded Fund) is an investment fund traded on an exchange that is composed of different types of assets, such as stocks, bonds, commodities, currencies or a combination of these assets within a single vehicle.

 

When investing in ETF, the investor buys a share that represents a proportional interest in the fund’s entire portfolio, without the need to purchase each asset individually. Like stocks, ETFs are liquid and can be bought or sold throughout the trading day.

 

In the Bradesco Investments App, eligible clients can buy and sell ETF shares traded on NASDAQ and NYSE. The share price is determined at the time of the transaction and varies according to supply, demand and other market conditions.

 

Before investing, it is important for investors to read the prospectus, which contains the fund’s offering documents. These documents explain in detail the fund’s objectives, associated risks, fees and the types of companies included in the portfolio.

 

What Are Thematic ETFs?

Within the ETF universe, there are several investing categories. Thematic ETFs are one of these groupings and are characterized by seeking exposure to a specific idea, trend or theme, such as technological innovation, clean energy, or advances in healthcare. Instead of tracking the overall market, these funds select companies that are connected to a particular theme or concept.

 

Some thematic ETFs are made up of groups of companies operating in the same technical area, such as artificial intelligence, cybersecurity, or biotechnology. Different types of assets may even be used to gain exposure to a thematic investing concept.

 

For example, the iShares Bitcoin Trust ETF (IBIT)* provides exposure to digital assets while the SPDR® Gold Shares (GLD)* provides investors with exposure to precious metals.

 

A theme does not always need to involve a group of companies. In some cases, it may be based on a single element such, as gold, clean energy or Bitcoin, rather than multiple individual stocks.

 

What Are the Differences Between Thematic ETFs and Traditional ETFs?

Traditional ETFs

Generally traditional ETFs track widely recognized indices and invest across many companies and sectors at the same time. This provides investors with an efficient way to access a broad portion of the market, covering large U.S. companies or a diversified mix of issuers, without buying every security in an index individually.

 

Thematic ETFs

On the other hand, Thematic ETFs focus on a single long-term idea or trend rather than the market as a whole. Thematic ETFs also offer investors an efficient way to access many companies, but are more targeted given their thematic tilt.

 

In fact, there are some multi-asset strategies structured around thematic objectives, such as seeking exposure to inflation or aiming to achieve real (inflation-adjusted) returns. These approaches may combine different asset classes, such as TIPS (Treasury Inflation-Protected Securities), commodities, and related exposures, to pursue these objectives.

 

The performance of thematic ETFs may be influenced by several factors, including how the index is constructed, the level of concentration in certain companies and overall market conditions. As a result, these funds may experience higher volatility and wider performance fluctuations compared to broad market indices.

 

However, Thematic ETFs provides investors with exposure to multiple investments or companies within a single theme, helping to diversify risk away from that of a single stock.

 

Thematic Investing Examples

The categories below are illustrative only. They do not represent investment recommendations or a list of approved products.

• Clean energy: includes companies linked to renewable energy technologies.
• Technological innovation: companies related to areas such as artificial intelligence, cybersecurity, or digital infrastructure.
• Infrastructure: includes companies involved in the development of physical or digital infrastructure.
• Healthcare innovation: companies in biotechnology, medical technology, or telemedicine.
• Aerospace and defense: companies that produce defense technology or operate in the aerospace industry.

Some ETFs also track traditional sectors of the U.S. economy. These include ETFs from the Select Sector SPDR® family*, which allow investors to focus on specific areas of the S&P 500. The Health Care Select Sector SPDR® ETF (XLV)* concentrates on healthcare companies, such as pharmaceutical firms and medical equipment manufacturers. The Energy Select Sector SPDR® ETF (XLE)* brings together companies involved in energy production and distribution. Finally, the Financial Select Sector SPDR® ETF (XLF)* tracks banks, insurers, and other financial institutions.

 

Investors must keep in mind that, because they are more concentrated, these ETFs may experience greater price fluctuations. As a result, many investors prefer to use thematic ETFs as a portfolio complement rather than as a replacement for broader and more diversified investments.

 

Why Are Investors Interested in Thematic ETFs?

1. Exposure to long-term trends: Thematic ETFs allow investors to gain easier and more direct exposure to themes such as technological innovation, clean energy or healthcare advances, without selecting individual companies.
2. Diversification within a single theme: Even when focused on a specific trend or sector, thematic ETFs still offer diversification by bringing together multiple companies related to the same concept.
3. Professional indices and clear rules: Thematic ETFs track indices with well-defined rules, providing transparency regarding how companies are selected and helping investors access more complex sectors in an organized and clear way.
4. Accessibility and cost efficiency: Like most ETFs, the thematic can be traded easily on exchanges, offering convenience and liquidity, often at lower costs than traditional investment funds.
5. Portfolio complement: For investors looking to complement their portfolios, thematic ETFs can provide exposure to themes that align with their convictions, personal interests and/or long-term expectations.

 

Interested in Investing in Thematic ETFs?

Investing in thematic ETFs can diversify an investment portfolio and provide exposure to trends shaping different sectors of the economy. Eligible clients can access thematic ETFs through the Bradesco Investments App, where they can review available options and research those that best align with their objectives and risk profiles.

 

What Are Some Important Risks to Consider?

Like any investment, thematic ETFs involve risks. Because they focus on a specific idea or trend, it is essential for investors to understand the factors that may affect their performance.

• Concentration risk: the fund may invest in only a few sectors or companies, which may result in higher volatility if significant changes occur in those areas.
• Methodology risk: the way the index is constructed and the rules used to select companies can directly influence fund performance.
• Regulatory and political sensitivity: certain themes may be affected by changes in government policies or regulations.
• Liquidity and pricing: some thematic ETFs, especially those focused on more niche themes, may have lower trading volumes, which can make it more difficult to buy or sell shares without affecting the fund’s price.

Understanding how thematic ETFs work helps investors make more informed decisions. These products contribute to the construction of a more diversified portfolio, aligned with each investor’s risk profile and objectives.

 

Important Notice

This material is provided for informational and educational purposes only. It is not intended and should not be interpreted as a recommendation, offer, or solicitation to buy or sell any security, investment product, or strategy. The examples and descriptions herein are illustrative and do not represent specific investment advice.

Investing in securities and financial assets involves risks, including the possible loss of invested capital. Past performance is not indicative of future results. This content is intended for a broad audience and does not take into account individual investment objectives, financial circumstances, or specific needs. Investors should carefully evaluate their own financial situation, objectives, and risk tolerance before making any investment decision. For personalized guidance, consult a qualified financial professional.