Rising Tide of Thematic ETFs Could Put Investors Underwater

Despite all the exceptionalism that is as American as a bald eagle chomping apple pie while cruising on a Harley-Davidson, the US is behind much of the world in some ways. One not-so-obvious area is investment in thematic funds, though thanks to the rise in active ETFs, the country is quickly catching up. That’s not necessarily a good thing.

Assets in thematic US funds grew 50% over three years as of the third quarter of 2025, bringing the country’s share of the $779 billion market to 23%, according to a report last week from Morningstar. That has happened as active ETFs have ballooned in number and total assets. “It feels a little bit like the Wild West in the US,” said the study’s author, Kenneth Lamont, principal of manager research at Morningstar. “There are many worries to me, if you look at them.”

Siren Song

It’s easy to see why people are drawn to thematic funds, as ventures like space exploration are interesting and exciting, Lamont said. But many of the relatively new ETFs come with higher than average fees that ultimately hinder their performance, he noted. And there is no consistency, as asset managers have varying ideas of what belongs even in an AI fund, for example. As with any active funds, the quality of investment managers also differs. And not all ideas pan out.

Take, for example, the Steadman Oceanographic Fund. It started in the mid-20th century and was based on the idea of building life underwater, including agriculture and housing. Though the fund survived for about 40 years, it continually lost money until its shares were worth less than a penny. A more successful investment product, Pictet’s Water Fund, started in 2000 and focuses on companies working to help meet demands for water globally. That firm, second only to BlackRock in thematic investment assets worldwide, recently launched its first US ETFs. 

“There is something very captivating about [thematics],” Lamont said. Largely, investors “just buy the story, not the actual investment.” In Europe, where assets in thematics have been declining, most products are mutual funds. In the US, active ETFs have led to ways for retail investors to make bets, in the worst cases akin to gambling, as seen with leveraged products, Lamont said.

A few highlights of the report:

• There were 332 US thematic funds as of Sept. 30.
• Net flows into them in the first three quarters of 2025 were $19 billion, showing the strongest demand since 2021.
• The biggest US issuers of thematic funds are First Trust, Global X, BlackRock, ARK and Kraneshares.

Theme Antics: Despite his many cautions, Lamont clarified that thematic funds tend to be a safer bet than picking individual stocks (trying to choose a winner in the AI race is a fool’s game, he said). Investors can set themselves up best by first picking a theme and sticking with it over the long term. Still, thematic funds are often concentrated and volatile, broadly underperforming the S&P 500 over time. Add to that the fact that active ETFs are frequently used by investors who try to time the market, and the numbers don’t look great, Lamont said. 

“History is littered with themes that didn’t really take off in the way that investors at the time thought they might,” he said.