Artificial intelligence has become a key investment narrative, fueling a significant influx of assets into thematic exchange-traded funds (ETFs) that allow retail investors to capitalise on major technology trends. Experts, however, caution that these funds have the potential to drop as rapidly as they rise. This is a crucial point for investors to consider, particularly as tech stocks show increased vulnerability, evident as they have been leading recent market declines. Notably, the Nasdaq is nearing a dip below its 50-day moving average for the first time since a downturn in April and recorded its third consecutive losing session on Thursday.
"We have nearly 400 ETFs at ETF Action that we classify as thematic," explained Mike Akins, a founding partner at the research firm ETF Action, on CNBC's ET 'ETF Edge.' The top performer has gained over 150% year-to-date, while some have seen declines of 10%, he noted.
Investors are drawn to thematic ETFs that cover trends such as AI, quantum computing, clean energy, and defense technology, often overlooking the risks involved, including portfolio volatility. Thematic ETFs typically focus on specific sectors or technologies rather than broad index tracking, potentially offering substantial gains when a theme is trending, but such momentum can also wane.
ETF Action categorizes the thematic ETF universe into 12 major categories with numerous subgroups. Within the disruptive technology category alone, which encompasses artificial intelligence, there have been substantial flows this year. "AI disruptive tech has seen almost $20 billion in flows year to date," Akins shared, noting about $15 billion of it includes 'AI' in the ETF name.
This surge has buoyed funds like the Global X Artificial Intelligence & Technology ETF (AIQ), growing to approximately $7 billion in assets, attracting around $3 billion in net flows since the year began, according to ETF.com. Its top holdings include Advanced Micro Devices, Alphabet, Samsung, Tesla, and Alibaba. Another example from Global X is the Robotics & Artificial Intelligence ETF (BOTZ), managing about $3 billion in assets under management, with top holdings of Nvidia, ABB, Fanuc, Intuitive Surgical, and Keyence.
Thematic ETFs necessitate more scrutiny than traditional funds. For instance, among the 18 ETFs classified by ETF Action as AI-focused, there is a 60% performance variance this year.
"Every new ETF introduces significant tracking error from merely investing in the market," Akins remarked.
During the first nine months of 2025, nearly 800 ETFs were launched, surpassing last year's record, per Reuters data. Morningstar indicates there are now over 4,300 U.S.-listed ETFs, more than individual stocks traded in the U.S.
Akins described the ETF market's growth as "overwhelmingly positive" for investors but noted that more opportunities also bring increased risks.
Themes leading the initial wave of thematic investing can lose momentum even as their underlying technology remains vital to the market, Akins mentioned. For example, ETFs centered on cloud computing and next-generation connectivity have witnessed billions flow out over the years as their top holdings matured and integrated into broad-based indexes already held by investors.
He clarified that this isn't a statement on whether cloud computing or connectivity are currently good or bad themes but rather a lifecycle phenomenon, which can lead to dwindled attention and flows as a theme matures. Consequently, themes might not offer the same high-growth prospects as when they initially soared in popularity.
However, Akins admitted that predicting the longevity of a trend's momentum is challenging. "I think every theme is unique to itself, so some are going to play out longer than others," Akins stated.