An exchange traded fund (ETF) that defines its investment approach and strategy according to a certain theme. Themes around which a thematic ETF can be built include technological breakthroughs, changing trends, demographics and alternative investments (e.g., the need for clean energy as a way of combating climate change). Thematic ETFs concentrate on certain industries, trends, or themes like technology, sustainability, environment, etc.

Thematic investing and thematic ETFs do not focus on traditional factors such as sector classifications or geographic boundaries. Instead, such funds are designed to provide exposure to a range of industries or sectors that have the potential to benefit from particular, structural, long-term megatrends. Thematic ETFs gain popularity by increasing demand for certain themes or global megatrends by investors seeking to participate in their upside potential.

The main advantages of thematic funds include (1) access to growth potential (exposure to transformative, long-term themes), (2) lower need for market timing (given the the long-term focus of the fund), (3) wider opportunities as this approach does not focus on traditional factors and criteria such as geographical boundaries, sector classification or segmentation, which means better universe of investment and improved flexibility. (For more, see: advantages of thematic ETFs).