Artificial intelligence (AI) has become a central figure in the market's investment narrative, significantly boosting the popularity of thematic exchange-traded funds (ETFs) that allow retail investors to engage with major technology trends. Despite the opportunity for substantial gains, experts caution that the value of these funds can diminish as quickly as they rise. This is a critical consideration for investors as tech stocks appear increasingly vulnerable, pulling the market down in recent sessions. The Nasdaq is teetering near a dip below its 50-day moving average, a situation not witnessed since April's downturn, and has recorded a third consecutive day of losses on Thursday.
"We have nearly 400 ETFs at ETF Action that we classify as thematic," said Mike Akins, founding partner at research firm ETF Action, during CNBC's "ETF Edge" on Monday. "The top performer is up over 150% year to date, yet several are down by 10%," he noted.
Investors are attracted to thematic ETFs focusing on trends such as AI, quantum computing, clean energy, and defense technology, but they often neglect the risks, like portfolio volatility. Unlike broad index-tracking funds, thematic ETFs focus on particular sectors or technologies, which can lead to substantial profits when a theme gains traction, but momentum may eventually decline.
ETF Action organizes the thematic ETF universe into 12 major categories with numerous subgroups. Within the disruptive technology category alone, which encompasses AI, fund inflows have been massive this year. "AI disruptive tech has attracted almost $20 billion in flows year to date," Akins reported, with around $15 billion of that having "AI" in the ETF name.
This upsurge has propelled funds like the Global X Artificial Intelligence & Technology ETF (AIQ), which has expanded to approximately $7 billion in assets, drawing about $3 billion in net inflows since the beginning of the year, as per ETF.com data. Its primary holdings include Advanced Micro Devices, Alphabet, Samsung, Tesla, and Alibaba. Another example from Global X is the Robotics & Artificial Intelligence ETF (BOTZ), boasting about $3 billion in assets under management, with Nvidia, ABB, Fanuc, Intuitive Surgical, and Keyence among its top holdings.
Thematic ETFs warrant more diligence than traditional funds. For instance, among the 18 ETFs classified as AI-focused by ETF Action, Akins mentioned a 60% performance variance this year.
"Whenever a new ETF enters the market, it introduces substantial tracking error compared to investing broadly in the market," he said.
Through the first nine months of 2025, almost 800 ETFs were launched, surpassing the record for ETF launches set just last year, according to Reuters. Morningstar data reveals that there are now more ETFs (over 4,300 U.S.-listed) than individual stocks traded in the U.S.
Akins described the ETF market's expansion as "overwhelmingly positive" for investor experiences but indicated that the proliferation of opportunities also equates to increased risk.
Some themes that ignited the initial wave of thematic investing can lose momentum as autonomous investment stories, despite remaining fundamental to the technology sector and market. Themes like cloud computing and next-generation connectivity, for instance, have experienced billions in outflows in recent years as top holdings matured and joined broad-based stock market indexes already in investors' portfolios.
He emphasized that this observation is not a judgment on whether cloud computing or connectivity are currently favorable or unfavorable investment themes but highlights a "lifecycle" to a theme, which can lead to reduced interest and inflows as it matures. Ultimately, this can mean that themes may not provide the same high-growth opportunities they did when they first gained traction.
However, Akins acknowledged that pinpointing the timeline for each trend's momentum is challenging. "Every theme is unique, so some will play out longer than others," Akins stated.