What are thematic ETFs and how well do they perform?

Thematic exchange-traded funds (thematic ETFs) focus on a specific theme or sector — providing investors diversification among several companies in that industry. (Learn: what are ETFs?)

New thematic ETFs are often launched to capture the momentum around an emerging sector.

• Cannabis in 2015 — MJ ETFMG Alternative Harvest ETF (NYSE:MJ)
• Blockchain in 2018 — Amplify Transformational Data Sharing ETF (NYSE:BLOK)
• Work from home (WFH) trend in 2020 — Direxion Work From Home ETF (NYSE:WFH)

How well do they perform? In most cases, not well. In the past 10 years, the S&P 500 beat out 34% of all thematic ETFs (via CNBC) while 30% shut down — likely from lack of investor interest.

In some cases, these ETFs follow themes that are prone to rise and fall. In others, they’re launched after a trend runs its course. The work from home ETF was launched after WFH stocks already went up multiple folds.

But the ones at the top, do very well:

• The top-performing ETFs in the past decade were centered around semiconductor, biotech and technology stocks — which more than doubled the return of the S&P 500.
• Cathie Wood’s ARK Innovation ETF (NYSE:ARKK) was the top-performing ETF of 2020 — beating the market average by nearly 10x.

The Joe’s take: When it comes to choosing a thematic ETF, picking the right sectors at the right time is important. Before investing, ask yourself:

• Will this industry be relevant in several years?
• How much has the ETF gone up in the past year and how much of this is based on speculation?