Markets have been volatile recently and, unlike the past few years, leadership is shifting quickly between sectors.
Some of the market’s biggest winners of the past cycle have suddenly become laggards, while areas that were largely ignored are now leading. That kind of environment tends to trigger a common question from our clients:
Should I be investing in thematic sector ETFs instead of broad market ETFs?
Over the past decade thematic ETFs have exploded in popularity. Artificial intelligence. Cybersecurity. Robotics. Clean energy. There now seems to be an ETF for almost every narrative about the future.
The pitch is simple. If a particular industry is going to grow rapidly, why not invest directly in it?
But there’s an important trade off that often gets overlooked.
When you buy a thematic ETF you’re not just deciding what to include in your portfolio.
You’re also deciding what to exclude.
Every thematic ETF creates a portfolio gap
A thematic ETF concentrates a portfolio around a single idea.
An AI ETF might own semiconductor manufacturers and software companies. A clean energy ETF might focus on solar manufacturers, battery producers and electric vehicle supply chains.
But concentration inevitably creates implicit bets.
If you overweight one sector you automatically underweight others, often dramatically. A portfolio heavily invested in technology themes may have very little exposure to banks, energy producers, commodity companies or consumer businesses.
Those omissions matter because markets rarely move in straight lines.
Leadership rotates between sectors, styles and factors. The areas that dominate one cycle often lag in the next. Predicting which industries will outperform, and how much of that optimism is already reflected in prices, is notoriously difficult.
Momentum can change quickly
Many thematic ETFs attract investors after a sector has already delivered strong performance.
Software is a great recent example.
Since 2020, software and high growth technology companies have been among the market’s strongest performers. As their share prices climbed, money naturally followed. Investors poured capital into technology themed ETFs and growth funds hoping to capture that momentum. Today more than $14 billion is invested in ASX-listed technology themed ETFs alone.
But recently leadership has shifted sharply.
Software companies have come under pressure as valuations reset and investors reassess growth expectations. Some of the more popular technology themed ETFs are down as much as 25% this year.
The impact hasn’t been limited to ETFs. Several of Australia’s best known active growth fund managers, many of whom built large positions in software companies during the boom years, have also experienced sharp drawdowns as the sector sold off.
At the same time areas that had been largely overlooked are now driving returns.
Resources and energy companies have delivered strong gains so far in 2026. Oil and gas producers in particular have benefited from higher commodity prices and geopolitical tensions in the Middle East.
For investors heavily concentrated in technology themes, those gains may have been largely missed.
A recent client conversation
This came up recently in a conversation I had with one of our prospective clients.
He told me he’d been building a portfolio outside Stockspot using several thematic ETFs. Artificial intelligence, robotics, cybersecurity, cryptocurrency and clean energy.
He asked me a question.
“How well do you think my portfolio is positioned for the future?”
Instead of answering, I asked him something else.
“What do you think the market’s expectations are for those sectors, and how confident are you that they will exceed those expectations?”
He paused for a moment.
I think it was something he, like many investors, hadn’t really considered.
Returns don’t come from owning the most exciting or future oriented sectors. They come from owning sectors and companies where the gap between expectations and reality moves in your favour.
If a sector is universally loved, heavily owned and priced for perfection, the hurdle becomes extremely high. It needs to deliver not just strong results, but results that exceed already lofty expectations.
If a sector is underestimated and priced conservatively, the hurdle is lower. Even modest improvements can produce strong returns.
That’s why consistently beating the market by picking themes is so difficult.
Why broad diversification still works
This is where I believe broad market ETFs, like the five core ETFs we recommend, have a structural advantage.
Diversified investing is built around inclusion rather than exclusion.
A diversified portfolio owns technology companies that benefit from innovation. But it also owns banks, energy companies and commodity producers when expectations for those sectors prove too pessimistic.
When leadership rotates, the portfolio adjusts naturally.
Diversification doesn’t rely on predicting which theme will outperform next. It simply acknowledges that markets rotate and that forecasting those rotations consistently is extremely difficult.
That approach may not feel exciting. You won’t always have a large exposure to the hottest sector at the moment it peaks.
But you also avoid the opposite outcome… missing the sectors that quietly drive returns while your chosen theme struggles.
The behavioural trap
There’s another challenge with thematic investing: money tends to follow performance.
Investors are naturally drawn to sectors that have recently delivered strong returns. As a result, flows into thematic funds often arrive after the strongest performance has already happened.
The impact can be a large gap between the returns an ETF or fund reports and the returns investors actually experience.
A good example is the ARK Innovation ETF, managed by Cathie Wood.
From inception to the end of 2025 the fund generated time weighted returns of roughly 233%, slightly ahead of the S&P 500 over the same period.
But the average investor experience was dramatically different. Because most inflows arrived after the fund’s strongest performance, the money weighted return for investors was closer to negative 35%.
In other words the fund made money, but many of the investors didn’t.
This is one of the biggest behavioural risks in thematic ETF investing. Investors often buy near peak excitement and sell after the theme loses momentum.
The simple indexed alternative
Instead of trying to predict the next winning theme, a broad-market ETF simply owns the market.
It captures the growth when new industries emerge.
It also captures the returns from established sectors that quietly drive economic growth.
That balance becomes particularly valuable during periods of rapid market rotation like the one we’re seeing today.
The recent shift away from software and toward energy and commodities isn’t an argument for investing thematically. If anything it’s a reminder of how unpredictable market leadership can be.
If you still want thematic exposure
None of this means thematic ETFs can’t play a role in a portfolio.
But if investors are tempted to allocate to them, it’s worth recognising the behavioural risks.
One way to reduce those risks is to dollar cost average into thematic ETFs over a year or two rather than investing all at once.
That approach reduces the temptation to buy when hype is at its peak. It also spreads timing risk across multiple entry points.
For most investors, however, the simplest and most reliable strategy remains the same.
Own the whole market.
Because when leadership inevitably rotates, diversification ensures you are already invested in the sectors that end up driving returns.
This article is adapted from an opinion piece published by Livewire Markets – The hidden bets inside thematic ETFs – (18 March 2026).
