Both approaches have pros and cons. Buying shares directly means the investor can pinpoint the copper company they believe provides the best exposure to the metal, at the right valuation. But that also means having to choose and monitor the copper company, and being exposed to stock-specific risk.

Investing in a thematic ETF may provide exposure to dozens of copper companies worldwide, potentially aiding portfolio diversification and removing the complication of choosing stocks. But some copper companies in the thematic ETF could be overvalued or lower quality, and the copper theme could disappoint if copper supply increases and demand weakens.

History shows that there are usually more company losers than winners with emerging industry trends, such as the internet-stock boom in the late 1990s. Owning an ETF that holds dozens of companies exposed to a trend could mean being exposed to losers, as well as potential winners, of that trend. 
 

Growth in thematic investing

A thematic ETF is an investment fund that buys shares in companies linked by a specific long-term investment theme or trend.

This is a different style of investing compared with owning an ETF over a broad-based sharemarket index, such as the S&P/ASX 200, which includes ASX-listed companies across a range of sectors, according to their market capitalisation.

More investors are using thematic ETFs to gain exposure to long-term trends based on the growth of these funds on ASX. Almost a quarter of the 468 ETFs quoted on ASX (at 31 August 2026) are sector or thematic-style ETFs, according to the ASX Investment Products monthly report.[1]

For some investors, one feature of thematic ETFs is gaining exposure to a basket of global companies exposed to an industry trend, through a single trade on ASX  at lower fees than some actively managed funds.[2]  

These investors may find thematic ETFs provide a different way to access global companies compared with purchasing individual overseas-listed shares are more convenient than investing directly in global companies. They might prefer the diversification that comes from investing in a basket of companies related to a theme, rather than individual stocks.

Also, some investment trends are more pronounced overseas. Australian investors wanting exposure to companies involved in artificial intelligence, space or defence, for example, may find greater choice in global equity markets.

Moreover, thematic ETFs enable investors to focus their research efforts on a theme rather than individual companies. For example, an investor who prefers ‘top-down analysis’ may have a positive view on the long-term potential of AI, but lack the skills or time to analyse and value AI companies.
 

Risks of thematic ETFs

Like all ETFs, thematic ETFs have risks. Because thematic ETFs typically invest in a narrower group of companies based on a trend, they have additional risks to consider compared to traditional ETFs over broad-based market indices. 

Here are six potential risks with thematic ETFs:
 

1. Timing

Some megatrends are prone to investment hype and speculation. A powerful trend or theme may capture investor imagination and boost valuations of companies exposed to that trend. In turn, a thematic ETF may launch after a trend is well known in the market, and company valuations have risen. 

As with any asset, investment outcomes may vary depending on the timing of an investment and the investor’s objectives, financial situation and needs. A powerful theme can still produce different long-term outcomes depending on valuation and the timing of the investment if investors buy too early or too late into that trend.
 

2. Valuation 

A potential risk of megatrend investing is focusing mostly on the theme and overlooking company valuations. Investors who focus on a theme without considering the valuations of the underlying companies may be exposed to companies trading at relatively high valuations. Diversification is no guarantee of avoiding investment loss if companies in the ETF are overvalued.

Fact Sheets on thematic ETFs (available on the ETF issuer’s website) typically show the fund’s average Price Earnings (PE) ratio. Investors can compare the average PE in a thematic ETF to a broader market PE, or assesses how the thematic ETF’s average PE has changed (by comparing previous fact sheets). In doing so, they may form a view on the ETF’s valuation.
 

3. Holdings

As with any ETF, it pays to ‘look under the hood’ with thematic ETFs and understand what they own. Fact Sheets on thematic ETFs usually show the top 10 company holdings and the fund’s allocation by sector and country. 

Some thematic ETFs, particularly those for less-established themes, may hold smaller companies that have less liquidity, or companies that are indirectly related to the theme. Investors should determine if the companies held in the thematic ETF adequately reflect the trend to which they seek exposure.
 

4. Concentration

Some thematic ETFs may have higher concentration risk compared to ETFs over broad-based indices. A thematic ETF in an emerging trend might, for example, hold 30 stocks, compared to an ETF that holds hundreds or thousands of companies. Holding fewer stocks may add to a thematic ETF’s risk profile.

Moreover, in some thematic ETFs, a single company, or small group of companies, might dominate the ETF by weighting. The investor may be less diversified through the ETF than they realise. Again, the key is understanding what the thematic ETF owns and if it meets the investor’s goals.
 

5. Overlap

Investors who combine stocks and thematic ETFs in their portfolio should consider the risk of duplication and overlap. 

Consider the earlier hypothetical example where the investor considered a thematic ETF in copper producers. If they also held BHP Group (ASX: BHP) directly in their portfolio, they may unwittingly have too much exposure to BHP through the thematic copper ETF, which has a high weighting in BHP.

Investors who hold multiple thematic ETFs in related industries should also be alert to stock overlap. A thematic ETF in AI, for example, might hold technology companies that are also held in other tech ETFs.
 

6. Currency

Currency risk is an important consideration for investors in all ETFs that own global assets. An investor seeking exposure to global assets through an unhedged thematic ETF will be affected by movements in the Australian dollar.

Currency movements can affect the Australian-dollar value of unhedged ETFs holding global assets. Hedged and unhedged thematic ETFs provide different currency exposures. Hedging may reduce the effect of exchange-rate movements but can involve additional costs and does not remove other investment risks.
 

Conclusion

Thematic ETFs have been an important addition to ASX over the past decade for investors and traders. Depending on their holdings and methodology, thematic ETFs can provide exposure to global companies associated with a specified investment theme. They may also involve timing, valuation, concentration, overlap, currency and other investment risks.. 

But gaining exposure to a global theme that may be well-established in the market, and where company valuations may already reflect the theme’s investment potential, are risks that investors should consider.
 

From ASX

The ASX Investment Products monthly report lists all ETFs on ASX. ETFs and other ETPs has information on the features, benefits and risks of ETFs.

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Sources

[1] Based on listings of ETFs categorised under Australian and global sectors in the report.

[2] Compared to actively managed funds, such as unlisted global equity funds.