Can the asset deliver quick exposure without adding new risks to complex portfolios?
Exchange-traded funds have become standard tools in institutional portfolios, but a subset of the market – thematic ETFs – is drawing fresh attention as allocators search for ways to move fast in volatile conditions.
Bobby Eng eses ETFs as serving two distinct roles in institutional portfolios – as strategic core holdings and as tactical instruments for acting on shorter-term market views. Thematics fall into the tactical camp. When something is happening in the market and an allocator wants to move on it, a thematic ETF offers a way in without the friction of other vehicles.
"Can ETFs be used for thematic calls? The answer is certainly yes, and they're very much used for that purpose,” says Eng, SVP and head of platform and institutional ETF distribution at Franklin Templeton Investments. “If you're looking for speed and accessibility … to either implement a view, maintain flexibility, have immediate liquidity, buy today, sell tomorrow, avoid lockups or capital calls compared to what you would have if you were to use other types of strategies, such as committal funds, separately managed accounts and private markets," he says. “When it comes to thematics, ETFs are an easy way to play those calls.”
Erik Sloane, executive vice president and head of distribution at Global X, describes thematic ETFs as “a very much a growing category. It's an area where Canadian asset managers have thrived over the last five to ten years," he says, adding thematics can be a way to express a specific investment thesis – whether targeting a sector, a country, or a focused slice of an industry – without trading all of the underlying securities individually.
Still, the question is whether these products deliver on their promise of rapid, targeted exposure without creating new problems for complex portfolios.
"I view thematic ETFs as just a delivery mechanism of a more focused exposure to a particular area of the market or area of the economy that is going through a form of transition or is expected to be a new phenomenon in the market,” says Greg Gipson, managing director and head of ETFs at CIBC Global Asset Management.
"Often because they tend to be more concentrated than a broad market, thematic ETFs are just a really efficient way to get that instant exposure to a particular theme in the market," he says, adding that the ETF often serves as a first step.
"An investor says, ‘OK, I like AI’. They buy the ETF. And then, in time … they may then target more of a stock or security specific approach, and then may rebalance out of the ETF," he added.
Eng also sees a similar dynamic among Franklin Templeton’s institutional clients.
"We're seeing ETFs being used as a proxy to get exposure very, very quickly and in a very liquid format," he says. "In many cases, an ETF is used as a placeholder. That could be anywhere between a few days, a few weeks, or even a few months until the PM or the team is able to pick and choose exactly where they want to narrow down their call," he says.
Gipson suggests thematic ETFs give investors a more targeted way to access parts of the market they believe stand to benefit from a specific trend, whether that is clean energy, artificial intelligence, or demographic change.
Unlike broad beta products tracking major indexes, these funds are built to zero in on narrower opportunities, often through rules-based methodologies that determine which companies genuinely fit the theme. That can include both obvious names and less direct beneficiaries, depending on how the provider defines the exposure.
Consequently, he sees thematic ETFs as structurally similar to other ETFs: they still provide access to listed public equities and are generally built to offer diversification, with the aim of capturing a theme rather than relying on any single stock or company.
Still, the case for thematic ETFs is not all that different from the case for ETFs more broadly, Gipson emphasized. After all, in a momentum-driven market, they can help investors capture upside through diversified exposure, and in a volatile market, they can help smooth out some of the swings that come with owning individual stocks.
He suggests that the stronger determinant is the investor’s objective rather than the market backdrop itself. For investors trying to access a theme without taking on single-name risk, the diversification built into a thematic ETF can also make the position easier to hold through choppy conditions.
Eng rattles off the themes attracting the most institutional attention right now with AI notably topping the list. While earlier waves focused on software, the attention now sits on infrastructure – the power, data centers, and hardware that underpin the hyperscalers as compute demand grows.
"Think about providers, power, things that ultimately drive and deliver the data center to the hyperscalers is where we've really focused on that next wave," notes Sloane, adding institutions and advisors are fielding client requests in the same space.
“As companies start looking at ways to improve resource allocations, everyone’s trying to figure out how can do more with the resources we have because we now have a really expanded toolkit to play with,” he adds.
Defence and aerospace, energy, and cybersecurity are other themes both Eng and Sloane highlight as rising NATO spending targets created demand for a diversified, long-term allocation that does not require investors to pick individual countries or sectors.
Sloane also flags growing interest in hyper-concentrated sector ETFs – products covering a handful of names in Canadian telcos, US banks, or Canadian banks – that give investors with macro or micro research teams a clean way to express a view without executing a 20-security basket trade on their own.
Elsewhere, Eng notes that ESG-oriented strategies, once dominant, have quieted down, but they still remain relevant. Where he sees the strongest pull, however, is factor-based ETFs – products that tilt portfolios toward quality, low volatility, value, momentum, or dividend-oriented securities.
Gipson sees thematic ETFs as useful in both long-term and short-term roles, depending on the objective of the position. For large institutions, making short-term moves directly in the market can be costly because of trading impact and transaction expenses, so a thematic ETF can serve as an efficient structural allocation or as a tactical tool. Whereas longer-term themes, like demographics may justify a standing position, while shorter-term uses are more likely to center on hedging, reducing volatility, or taking advantage of market dislocations at better entry points.
He also frames the decision as a portfolio construction issue. In a core-satellite setup, a broad strategic view may sit at the center of the portfolio, while thematic ETFs are used in the satellite sleeve to express shorter-term rotations or more targeted calls.
According to Eng, the typical tactical allocation to a thematic ETF runs between three and five per cent of a portfolio. With this allocation, investors can seek added return or manage risk without reshaping the whole portfolio.
Liquidity also still matters, particularly for larger allocators, because they need to make sure the underlying holdings can absorb flows without the investor effectively driving the market, says Gipson.
"There's tons of various different thematic ETFs that provide very quick, very fast exposure. So, institutional investors can tilt their portfolios very quickly and efficiently at a low cost," says Eng.
