How Do You Evaluate a Thematic ETF?

By Adam Patti, Chief Executive Officer, VistaShares | November 2026

Evaluating a thematic ETF means looking past its name to what it actually owns and how it decides what to own. The key questions are how closely its holdings are tied to the theme, a measure often called purity; how concentrated the portfolio is; how much it overlaps with funds the investor already holds; how the index or manager selects and weights companies; and what the fund costs. Two funds with similar names can hold very different portfolios.

What is a thematic ETF?

A thematic ETF invests in companies expected to be affected by a long-term structural trend, such as artificial intelligence, electrification, robotics, space or defense, rather than by a traditional sector or geographic classification. Themes often cut across sectors. An AI infrastructure theme, for example, might include semiconductor companies, utilities, equipment makers and real estate owners.

Thematic funds have grown into a substantial part of the fund market. Morningstar counted a record 3,198 live thematic funds globally at the end of the third quarter of 2025, with assets of about $779 billion, a three-year high.¹ Fund launches have historically risen and fallen with broader market conditions, and Morningstar has reported that thematic launches peaked shortly before both the dot-com bubble and the global financial crisis.² That pattern is a reminder that a theme’s popularity and its investment merit are separate questions.

How closely are the holdings tied to the theme?

Purity, sometimes called thematic exposure, measures how much of each company’s business is actually connected to the theme. A company that earns most of its revenue from AI data center equipment is a purer AI infrastructure holding than a conglomerate with a small AI-related division.

Funds approach purity in different ways:

Revenue thresholds. Some indexes include only companies that earn a minimum share of revenue from theme-related activities.

Revenue weighting. Some weight holdings by the share of revenue tied to the theme, so purer companies receive larger positions.

Keyword or classification screens. Some use industry classifications, patent data, or natural language analysis of company filings to identify relevant companies.

Manager judgment. Actively managed thematic ETFs rely on the portfolio manager’s assessment.

A useful check is to read the fund’s methodology and review its top holdings. If the top positions are large, diversified companies with limited direct exposure, the fund may behave much like the broad market.

How concentrated is the portfolio?

Concentration describes how much of the fund’s assets sit in a small number of holdings, industries or countries. Look at the weight of the top ten holdings, the number of holdings in total, any caps on individual positions and the geographic mix.

Concentration cuts both ways. A focused portfolio can provide more direct exposure to the theme, but it also increases the influence of individual companies on the fund’s results. Many thematic funds also lean toward a particular investment style, such as growth or smaller companies, which adds another layer of risk.

How much does it overlap with what you already own?

Overlap measures how many of a fund’s holdings, by weight, also appear in another fund. Many thematic funds hold large companies that already make up a significant share of broad market indexes. An investor who owns an S&P 500 index fund and adds a thematic fund with heavy overlap may increase concentration in the same companies rather than add new exposure.

Comparing holdings between a thematic fund and an investor’s existing core holdings helps clarify what the thematic fund adds. Low overlap suggests distinct exposure; high overlap suggests the fund is reinforcing positions the investor already has.

How does the fund select and weight holdings?

For index-based thematic funds, the index methodology determines everything. Relevant details include the selection universe, eligibility rules, purity thresholds, liquidity and size requirements, weighting method, position caps and how often the index rebalances and reconstitutes.

Weighting methods matter in particular. Market capitalization weighting gives bigger companies bigger positions. Equal weighting gives each company the same position at each rebalance, which tends to increase exposure to smaller companies. Modified or tiered weighting approaches blend the two, sometimes adjusted for purity.

For actively managed thematic funds, the prospectus and the manager’s stated process take the place of an index methodology. Investors should understand how the manager defines the theme and decides when to add or remove companies.

What does it cost?

Thematic ETFs generally carry higher expense ratios than broad index funds, reflecting the cost of specialized indexes and research.³ Beyond the expense ratio, consider trading costs: the bid-ask spread on the ETF’s shares and the liquidity of its underlying holdings. Thematic funds that hold smaller or international companies can have wider spreads.

Is the fund likely to remain available?

Fund closures are more common in thematic categories than in broad market funds. Morningstar reported that thematic fund closures outpaced launches globally in the first half of 2024, for the first time since 2013.² A fund that closes is typically liquidated, which can create an unplanned taxable event for investors in taxable accounts. Asset size, trading volume and the sponsor’s commitment to the strategy are reasonable indicators to review.

How should a theme fit in a portfolio?

Many investors use thematic ETFs as complements to a diversified core rather than as replacements for it. Sizing depends on the investor’s conviction in the theme, the fund’s concentration and overlap, and the investor’s tolerance for volatility. It also helps to separate the theme’s long-term trajectory from the valuation of the companies involved: a theme can continue to develop while the stocks associated with it have already reflected high expectations.

Our articles on the AI supply chain, AI power and electrification and supercycles in investing provide background on themes investors often evaluate. Investments involve risk, including possible loss of principal.

Frequently asked questions

What does purity mean in a thematic ETF?

Purity measures how much of each holding’s business is connected to the fund’s theme, often based on revenue. A fund with high purity holds companies whose results depend substantially on the theme. A fund with low purity may hold large, diversified companies with only a small connection, which can make it behave more like the broad market.

How can I check overlap between two ETFs?

Compare the holdings of each fund, which most ETFs publish daily on their websites, and add up the weights of companies held by both. Many research platforms offer overlap tools that do this automatically. Overlap measured by weight is more informative than a simple count of shared names.

Are thematic ETFs actively or passively managed?

Both types exist. Many thematic ETFs track rules-based indexes designed around a theme, while others are actively managed, with a portfolio manager selecting holdings. Index funds disclose their methodology; active funds describe their process in the prospectus. Either way, understanding how holdings are chosen is central to evaluating the fund.

Why do thematic ETFs often cost more than broad index funds?

Thematic funds typically rely on specialized indexes or research to identify companies tied to a theme, and they often hold fewer, more specific companies. Licensing, research and smaller asset bases can all contribute to higher expense ratios. Investors should weigh those costs against the distinct exposure the fund provides.

What happens to my investment if a thematic ETF closes?

When an ETF closes, it typically sells its holdings and distributes the proceeds to shareholders. In a taxable account, that can create a capital gain or loss at a time the investor did not choose. Reviewing a fund’s size, trading activity and sponsor can help gauge the risk of closure.

How much of a portfolio should go to thematic ETFs?

There is no single answer. Many investors treat thematic ETFs as satellite positions around a diversified core, sized according to their conviction, risk tolerance and the fund’s concentration. A financial professional can help determine an appropriate allocation for individual circumstances.

This material is provided for educational purposes only. It is not investment, legal or tax advice, and it is not a recommendation or an offer to buy or sell any security. Information is drawn from sources believed to be reliable as of the date of publication, is not guaranteed as to accuracy or completeness, and may change without notice. Figures attributed to third parties are their estimates. Projections and forecasts are not guarantees of future results. Investors should consult their own financial, legal and tax professionals before making investment decisions. Investments involve risk, including possible loss of principal. Companies in a single industry or theme may be affected by common economic, regulatory or technological developments and may be more volatile than the broad market. References to companies, governments or programs are for illustration only.