Fact checked by Vikki Velasquez
Key Takeaways
-
Thematic ETFs give investors targeted exposure to long-term trends with the potential to transform an industry or the economy.
-
Values-aligned ETFs help investors incorporate personal beliefs or priorities into their portfolios.
-
These funds can also increase concentration risk, volatility, and costs.
-
Investors should look beyond their stated objectives and evaluate each option’s methodology, holdings, and financial characteristics before buying.
Thematic and values-aligned ETFs allow investors to pursue their financial goals while expressing convictions about long-term trends or a personal code of ethics.
These niche ETFs, though, can often carry more risk than broad-market index funds. This guide explains what thematic and values-aligned ETFs are, how they differ from each other, and what investors should consider before incorporating them into their portfolios.
What Are Thematic ETFs?
Thematic ETFs are exchange-traded funds (ETFs) that invest in stocks the fund overseer believes are positioned to benefit from a specific long-term trend. That often refers to a structural shift in areas like technology, demographics, or the environment with the potential to transform industries or the economy.
BlackRock organizes its thematic ETFs around five trends:
-
Digital disruption and artificial intelligence (AI)
-
Global fragmentation in business
-
Adoption of low-carbon energy systems
-
Aging populations in major economies
-
Fast-evolving financial architecture
“A traditional index ETF tracks a broad market or a broad segment of the market,” said Scott Jones, founder of Genesis Wealth Advisor Group. “A thematic ETF is much narrower. It picks a story about the future and builds a basket of companies the fund sponsor thinks will benefit if the story plays out.”
Note
As of May 2026, there were almost 400 thematic ETFs in the United States, with a collective $256 billion in assets under management (AUM). The iShares A.I. Innovation and Tech Active ETF (BAI) was the biggest, with nearly $14 billion in assets.
What Are Values-Aligned ETFs?
Values-aligned ETFs use personal ethics, religious or political beliefs, or social values as a roadmap to choosing investments. This typically involves screening companies to include those that embrace a certain viewpoint or to exclude those that are active in industries deemed misaligned with those views.
Common variations include:
-
ESG funds: Consider a company’s environmental, social, and governance (ESG) practices when evaluating it for investment.
-
Faith-based funds: Align with the principles of a specific faith, often by excluding industries like gambling, tobacco, and alcohol.
-
Social-impact funds: Prioritize investments that support targeted social or community goals, such as affordable housing or economic mobility.
Importantly, selection criteria can vary significantly between values-aligned funds, even when they use similar labels.
“Each fund applies its own methodology,” said Jones. “Two ESG funds can hold very different companies just as two Catholic-values funds can screen very differently.”
Why Investors Choose These ETFs
Investors generally choose thematic ETFs because they have convictions about a long-term growth opportunity. They are a concentrated bet on stocks that may benefit from what the investor views as a structural trend that will have an enduring impact. They may believe that clean energy will displace fossil fuels, or that artificial intelligence will rewire the global economy.
“If an investor believes AI is the defining structural change of the next 20 years, an AI thematic fund concentrates their bet,” said Jones. “A broad-market S&P 500 fund would give them roughly the same exposure to AI everyone else has.”
Investors choose values-aligned ETFs primarily for nonfinancial reasons. They may want to invest in companies according to religious precepts or political views, which can limit exposure to the market, sometimes at the expense of overall returns. While some methodologies may be expected to have a neutral impact on performance, many have the potential for lower returns because they prioritize ethics over financial optimization.
“Values alignment is a conviction thesis,” said Nick Garofalo, founder of Openhanded Wealth. “You don’t want your capital compounding in ways that conflict with what you believe, even if it costs you some return on paper.”
Note
In 2026, Morgan Stanley found that 92% of global investors reported an interest in sustainable investing, up from 88% in 2025. However, the average share of portfolios allocated to sustainable investments fell to 31% in 2026 from 33% last year.
Benefits and Risks
Thematic and values-aligned ETFs allow investors to customize their portfolios by gaining targeted exposure to investments that align with their convictions, whether those involve a long-term structural trend or a set of personal beliefs.
Emphasizing or excluding certain types of investments can make these ETFs less diversified. If the underlying trend doesn’t develop as expected, or the companies that fit the fund’s criteria underperform, investors may experience greater volatility and outsize losses.
“For most clients, thematic and values-aligned funds work best in a core and satellite approach, with the specialty funds being a satellite around a diversified core,” said Jones. “Often, it’s a 10%, 25%, maybe a 50% sleeve. The sleeve carries the client’s conviction, and the rest of the portfolio is free to invest as appropriate for diversification.”
Thematic and values-aligned ETFs can also carry higher expense ratios than broad-market index funds, especially when they involve specialized research or active management. These costs directly reduce investment returns and can compound into meaningful differences over time.
Warning
The average expense ratio among the nearly 400 thematic ETFs is 0.63%, according to ETF.com.
Assessing a Thematic or Values-Aligned ETF
The popularity of thematic and values-aligned ETFs has led to a flood of issuance in recent years, with new funds vying for attention. That’s led to some slick marketing, but it’s important to review any investment for its merits.
“A label can describe the marketing more than the underlying investment philosophy,” said Garofalo. “Investors should look under the hood, check the holdings and screening criteria, and confirm the fund matches what they believe.”
Investors should also evaluate each fund’s financial characteristics, such as its costs and historical performance. Even for values-aligned investors, who may be prioritizing a nonfinancial goal, these factors are relevant.
“Compare the expense ratio to a plain index fund and ask whether the fund’s work justifies that premium,” said Garofalo. “Check liquidity too: AUM and average volume matter because thin funds carry wider spreads and can be harder to exit cleanly.”
The Bottom Line
Thematic ETFs give investors targeted exposure to long-term trends with transformative potential, while values-aligned ETFs help them incorporate personal beliefs or priorities into their portfolios.
These funds can also increase concentration risk, volatility, and costs, so investors should look beyond their stated objectives and evaluate each option’s methodology, holdings, and financial characteristics before buying.
Read the original article on Investopedia