Megatrends such as AI, renewable energy, demographic shifts, and digital transformation are reshaping the investment landscape. While traditional sector and geographic classifications have served portfolio construction well for decades, they don’t always capture the full scope of cross-cutting macro changes. This is where thematic investing enters the picture, offering exposure to structural trends that transcend conventional boundaries.
Not all thematic funds are created equal. As assets in US-listed thematic ETFs have grown to over $193 billion today from $22 billion in 2015, the challenge for institutional investors has shifted from whether to embrace thematic investing to how to identify quality implementations. This article, the first in a three-part series, explores what distinguishes successful thematic funds and examines how sophisticated data infrastructure can support thematic portfolio construction.
The proliferation of thematic products has created classification challenges. It’s important to have criteria to distinguish genuine thematic funds from sector funds with creative marketing. In our fund database, a true thematic fund must:
Support a predominant long-term macro investment trend with staying power
Draw holdings from a selection universe tied to the theme's supply chain
Source securities from multiple sectors, not just subsectors of a single industry
Demonstrate sustained investor interest (minimum two funds in the theme, with at least one exceeding $100 million AUM)
Themes are not:
Industry subgroups within a single sector
Geography-specific sector funds (e.g., China technology)
Investment style factors like value, growth, or quality
This framework helps separate enduring megatrends from transient hype cycles. For example, the Internet wasn't a passing fad in the 1990s as it fundamentally transformed global commerce. Conversely, despite intense 2021-2022 enthusiasm the metaverse has demonstrated less staying power, and several metaverse ETFs have already closed.
Data quality and index methodology are crucial for building reliable, long-lasting thematic indices.
As thematic ETFs have matured, industry observers have noted a shift away from homegrown indices based on loose narratives toward partnerships with established data and index providers.
To prevent inconsistencies, redundancies, or gaps, it’s important to use a rules-based approach that is repeatable across a suite of thematic indices. The foundation of reliable thematic indexing includes the following elements.
Comprehensive point-in-time data: Without accurate historical entity and security masters, backtests are prone to survivorship bias (excluding failed companies) and look-ahead bias (overweighting future winners based on knowledge of subsequent success). This is particularly critical for themes populated by emerging companies with high turnover rates.
Revenue-based business classification: Our FactSet Revere Business and Industry Classification System (RBICS) with Revenue data offers granular visibility into company operations. Consider Amazon, for example, with 17% of revenue now from web hosting services with another 7% from entertainment content. This level of detail enables precise thematic mapping beyond headline business descriptions.
Supply chain data: Thematic indices should reflect the entire value chain, not only the most visible companies. For example, an infrastructure theme should hold construction firms, materials suppliers, equipment manufacturers, and utilities.
Human-validated classification tags: Index providers must ensure that selected constituent companies represent the theme. Morningstar research found that many thematic funds rely on keyword searches of regulatory filings, which companies can exploit with keywords matching prominent trends. Third-party analyst verification of business activity tags provides more reliable classification, which is particularly important given themes evolve rapidly.
Not all themes achieve lasting traction. Analyzing US-listed thematic ETFs with at least $100 million AUM reveals clear patterns. The legend in the following figure stacks the niche labels in the same order as their 2025 AUM, with the largest on bottom and smallest on top.
The top three dominant themes by AUM are:
Infrastructure: $29 billion
Robotics & AI: $22 billion
Internet: $22 billion
The top 12 thematic niches account for over 90% of total thematic AUM.
Portfolio managers and analysts evaluating thematic ETFs may want to consider multiple dimensions of fund quality beyond price performance.
Thematic purity: Does the ETF include the pure-play companies investors expect? The Defiance Pure Electric Vehicle ETF closed after nine months partly because it excluded BYD while concentrating in just five holdings. Conversely, excessive weighting toward large-cap names with limited thematic exposure (such as Ford and GM in an electric vehicle ETF) dilutes the investment thesis.
Efficiency metrics: We rate thematic ETFs on efficiency (costs and risks of ownership) and tradability (liquidity and trading costs). High-scoring funds demonstrate low holding costs, tight index tracking, minimal structural risk, low closure risk, and strong transparency.
Risk factor exposures: Different implementations of the same theme can exhibit dramatically different risk profiles, such as when a focus on different parts of the supply chain may lead to heave concentration in sectors or geographies.
Cross-sectional diversification: Companies within a theme should be correlated to the macro drivers of the theme, while having lower correlation to related sectors and industries. Well-constructed theme families also minimize constituent overlap. As an example, the iSTOXX thematic indices launched in 2016 maintained disciplined boundaries—AGED/DGIT overlap decreased to just one security, while DGIT/RBOT overlap remained at zero, even as constituent counts increased substantially over nine years.
Thematic funds support multiple institutional portfolio applications:
Core holdings: For investors with strong conviction about multi-year megatrends—such as AI-driven economic disruption over the next five years—thematic ETFs provide concentrated exposure.
Satellite positions: Thematic tilts can complement traditional core portfolios, expressing tactical views on structural trends while remaining aligned to a core benchmark.
Regime-sensitive allocation: Risk models can identify how thematic funds respond under different macroeconomic conditions, such as growth versus contraction, inflationary versus deflationary environments, or risk-on versus risk-off sentiment. This enables dynamic allocation frameworks where themes rotate based on macro regimes.
Event-driven strategies: Pure thematic implementations should respond predictably to theme-relevant news. Portfolio analytics can measure thematic ETF correlation with benchmark indices versus traditional risk factors, identifying which products offer genuine thematic exposure versus disguised sector bets.
The thematic investing landscape continues to evolve rapidly. Several areas merit ongoing research and monitoring:
Thematic momentum and rotation: With sufficient differentiation among themes, rotation strategies similar to sector or country rotation become viable. Performance dispersion across themes since 2020 suggests potential for systematic approaches.
Event responsiveness: Markets since 2020 have experienced unprecedented disruptions—pandemic onset, remote work transitions, AI breakthroughs, and trade policy volatility. Studying theme-specific responses to these events may enhance timing and selection decisions.
Private market applications: As fewer companies pursue public listings, private equity and venture capital increasingly dominate early-stage thematic exposure. Our business activity tags covering private companies enable sophisticated market mapping and custom benchmarks for high-growth verticals.
Alternative asset tokenization: Real estate, infrastructure, and other real assets represent substantial thematic exposure opportunities. Tokenization may accelerate the creation of tradable thematic indices beyond traditional equity markets.
Thematic investing offers powerful tools for capturing megatrends that reshape economies and markets. However, implementation quality varies significantly across products. Institutional investors benefit from understanding the data infrastructure, classification methodology, and risk characteristics that distinguish thematic funds from marketing narratives.
As thematic investing matures from a niche strategy to a mainstream portfolio tool, transparent methodologies built on high-quality revenue-based business classification, comprehensive supply chain data, and rigorous validation processes will increasingly separate successful long-term offerings from short-lived products destined for closure.
The combination of compelling themes, pure implementation, efficient structures, and appropriate portfolio integration creates opportunities to capture growth from structural disruptions that traditional classifications may fail to address.
Our Portfolio Analytics module provides comprehensive tools for evaluating thematic ETFs, including risk factor attribution, scenario analysis, and efficiency scoring. Additionally, RBICS with Revenue reveals the true sector exposures of a company, index, or portfolio based on a multi-sector classification of each firm’s primary and ancillary revenues to the 1,900+ subindustries of RBICS.
You can also download our free whitepaper: Capturing Megatrends with a Data-Driven Approach to Thematic Investing. It breaks down the criteria that distinguishes credible thematic ETFs and explains how successful strategies are built, evaluated, and sustained over time.
To learn more about incorporating thematic strategies into institutional portfolios, contact your FactSet representative.
This blog post is for informational purposes only. The information contained in this blog post is not legal, tax, or investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.