Thematic investing: build your own thematic index instead of buying a thematic ETF.
Pick the companies that actually express the theme, weight them the way you want, and see what that basket would have done before you put a dollar behind it.
Educational only · Never places a trade
In short
Thematic investing means organizing a portfolio around a long-run trend, such as electrification or cybersecurity, rather than around a sector or an index. The idea is sound and the packaged products are the weak part: Morningstar found that only about one in ten thematic funds both survived and beat a broad global equity index over the fifteen years to mid-2024, and that the average thematic fund kept almost half its assets in ten holdings while charging over 0.60% a year. If you want theme exposure, defining the basket yourself is the version you can control, because you choose the holdings, cap the concentration, set the weights, and test the whole thing against the S&P 500 before you commit.
Last updated July 2026
Does thematic investing work
What the research actually says about thematic funds
Every figure below is from published Morningstar research, with the period end date stated. Two different datasets are involved, so read the right-hand column before quoting any line.
| Measure | Figure | Source and period |
|---|---|---|
| Survived their first year | 94% | Morningstar, data through 2020 |
| Lasted 15 years or longer | Under 15% | Morningstar, data through 2020 |
| Share of assets in the 10 largest holdings, average thematic fund | Almost 50% | Morningstar, data through 2020 |
| Same figure for the MSCI ACWI Investable Market Index | About 12% | Morningstar, data through 2020 |
| Typical annual fee | Over 0.60% | Morningstar, data through 2020 |
| First two years versus MSCI ACWI IMI, funds launched 1996 to 2018 | 3.3 percentage points behind per year | Morningstar, data through 2020 |
| Beat broad low-cost global equity indexes over the 3 years to mid-2024 | 9% to 25% | Morningstar Global Thematic Fund Landscape |
| Both survived and outperformed over the 15 years to mid-2024 | About 1 in 10 | Morningstar Global Thematic Fund Landscape |
Read those rows together and a pattern falls out. Thematic funds get launched after a trend is already obvious, which is when prices are highest. Morningstar measured funds launched between 1996 and 2018 trailing the MSCI ACWI Investable Market Index by 3.3 percentage points a year over their first two years of life. Then interest fades, assets never arrive, and the fund closes. The funds that liquidated held a median of $5 million twelve months before they were wound up.
None of this says the underlying theme was wrong. Plenty of the trends were exactly right and the fund still closed, or the fund survived and the one incumbent it was forced to hold ate the return. What the numbers say is that buying the theme through somebody else's product introduces problems the theme never had: their entry timing, their concentration, their fee, their decision about when to shut down.
Thematic investing examples
What a thematic index looks like in practice
These are illustrations of how a theme gets turned into a holdings list, not recommendations and not a view on any company. The point of each one is the construction question it forces you to answer.
Data center buildout
The picks-and-shovels version of AI: power equipment, cooling, networking gear, construction. The construction question is whether you let one or two giant chip designers into the list, because if you do, cap weighting hands them most of the basket and you have bought a proxy for two stocks.
Electrification and grid
Utilities, transmission equipment, cable and transformer makers, storage. Very different risk profile from a clean-energy fund, because the holdings are regulated and slow rather than speculative. Equal weighting suits it, since no single name is obviously the pure play.
Cybersecurity
A theme with genuine pure plays, which is rare. The question here is coverage: endpoint, identity, network and cloud security are separate businesses that trade on different cycles, so a basket of four names is really four bets.
Aging demographics
Medical devices, senior housing, hearing and vision, pharmacy. Cuts across four sectors, which is exactly what makes it a theme rather than a sector fund, and also what makes it hard to benchmark against anything off the shelf.
Reshoring and industrial capex
Machine tools, automation, logistics real estate, electrical contractors. Slow-burning and cyclical, so the backtest window matters enormously. Test it through a full cycle or the number you get is meaningless.
A crypto sector theme
Layer ones, exchanges, infrastructure tokens. Cap weighting here is dominated by Bitcoin to the point where the theme disappears, which is why weighting is the whole decision. See the crypto index page.
More worked examples, including how to decide whether a company genuinely belongs in a theme, are in thematic investing examples.
Thematic ETF vs your own index
What you give up by buying the theme in a wrapper
What a thematic ETF gives you
- One ticker, one trade, no maintenance. That is a real advantage and worth paying something for.
- A methodology someone else defends in writing, which matters if you are answering to a client or a committee.
- Automatic reconstitution as companies enter and leave the theme, without you having to notice.
- Intraday liquidity in the wrapper even when some underlying holdings trade thinly.
What it takes away
- Holdings control. Nearly every theme fund holds the mega cap incumbent, and cap weighting then makes it the largest position.
- Concentration control. Almost half the average thematic fund sat in ten names, and you cannot cap that from outside.
- Cost. Over 0.60% a year against a fraction of that for a broad index fund, compounding for as long as you hold it.
- Duration. If the fund closes you are out on the sponsor's schedule, with the tax consequences landing in your year, not theirs.
Building the index yourself flips all four of those, and adds one thing a fund can never offer: you can test the exact list before you own it. Run the basket you are considering against the S&P 500 over your own start and end dates, look at the worst drawdown next to the return, and decide with a number in front of you. That is what backtesting a portfolio is for.
The honest cost of doing it yourself is work. You maintain the list, you decide when a company stops belonging in the theme, and you place the trades in your own brokerage account. Indexes is educational and informational software for designing and testing an index. It never places trades, connects to a brokerage or holds assets, and backtests are hypothetical results that do not predict future returns.
How it works
Turn a theme into an index in four steps
Write the theme in one sentence
If you cannot say in a sentence why a company belongs, it does not go in. This single rule removes most of the drift that turns a theme basket into an expensive large cap fund.
Build the holdings list
Add the tickers. Somewhere between 12 and 30 names is where most self-built themes land: enough that one miss does not decide the year, few enough that the theme is still visible.
Choose the weighting deliberately
Cap weighting will usually hand the basket to the biggest incumbent. Equal weighting gives the pure plays real influence. Custom weights let you express conviction. Test all three on the same list.
Backtest, then track it
Run the basket against the S&P 500 over a full cycle, read the drawdown as carefully as the return, and keep it tracked afterward so you find out whether the thesis is playing out.
Who builds theme indexes
Who this is actually for
People with a view and no fund for it
The most specific themes never get a product, or get one that holds forty adjacent names to reach an asset target. Building it yourself is the only way to hold the version you actually meant.
Advisors sizing a satellite sleeve
Morningstar's own conclusion is that thematic exposure belongs in a satellite position. Modeling the sleeve and its drawdown before it goes in front of a client is the work that makes that defensible.
Anyone comparing two theme funds
Rebuild both holdings lists as indexes, run them over the same window, and the marketing difference between the two funds usually turns out to be three positions and 30 basis points.
Concentrated-position holders
If your employer stock already gives you the theme, the useful exercise is designing the basket that gives you the rest of it without doubling down. See direct indexing.
Crypto sector investors
Crypto themes are where weighting does the most damage, because market cap weighting collapses almost every basket into a Bitcoin position with a tail.
People who want the list, not the wrapper
Some investors just want a maintained, weighted, tracked list they execute themselves. That is a stock basket, and it is the oldest use of an index.
Questions
Thematic investing, answered
What is thematic investing?
Thematic investing means building a portfolio around a long-run trend rather than around a sector, a country or a market cap band. You pick a theme such as electrification, cybersecurity, aging demographics or the buildout of AI infrastructure, then hold the companies you believe are exposed to it. The defining feature is that the organizing idea comes first and the holdings follow from it.
What is an example of thematic investing?
A cybersecurity basket holding the pure-play security vendors is a thematic position. So is a water infrastructure basket, an obesity-drug basket, a defense basket, or a basket of the companies that supply picks and shovels to data center construction. The test is whether a single sentence explains why every holding is in the list. If it does not, it is a sector fund with a marketing name.
Does thematic investing actually work?
The record for thematic funds is poor. Morningstar found that only 9% to 25% of thematic funds beat broad low-cost global equity indexes over the three years to mid-2024, and that over the 15 years to that date only about one in ten both survived and outperformed. That is not proof a theme cannot work. It is evidence that most packaged themes are launched late, priced high and closed early.
Why do so many thematic funds close?
Themes go out of fashion faster than funds can gather assets. Morningstar found that thematic funds which liquidated or merged held an average of $25 million twelve months before closing, with a median of just $5 million. When fee revenue stops covering the cost of running the portfolio, the fund is wound up and holders get a taxable distribution on the sponsor schedule, not their own.
Is thematic investing risky?
It concentrates two risks at once. The average thematic fund had almost half its assets in its ten largest holdings against roughly 12% for the MSCI ACWI Investable Market Index, so single stock risk is high. On top of that the theme itself can simply be wrong or early. Position size is the honest control here, and it is the one a fund never lets you set.
What is the difference between thematic and sector investing?
A sector is a fixed classification, so an energy fund holds companies the classification system labels energy. A theme cuts across classifications: an electrification theme might hold a utility, an industrial, a materials company and a semiconductor firm. Themes describe an idea, sectors describe a filing category, and the two overlap only by accident.
How many stocks should a thematic index hold?
Enough that no single company decides the outcome, few enough that the theme stays recognizable. Most self-built theme baskets land somewhere between 12 and 30 holdings. Below about ten, one earnings miss dominates your result. Above about forty, you have usually diluted the theme with adjacent large caps and would be better off owning a broad index at a fraction of the cost.
Should I buy a thematic ETF or build my own thematic index?
A thematic ETF is simpler and can be bought in one trade, but you inherit its holdings, its weighting, its fee and its closure risk. Building the index yourself lets you exclude the mega cap incumbent that dominates most theme funds, set your own weights, and backtest the list before committing. Indexes is the design and testing step; it never places trades or holds assets, so an account is still where you would execute.
Own the theme, not somebody's product
Build the holdings list yourself, weight it deliberately, and backtest the theme against the S&P 500 before you commit. No account, no minimum, no trades. Educational and informational only.