Fund buyers are increasingly prioritizing purity of exposure, diversification and transparent index construction

Thematic ETF investing is becoming more targeted as wealth managers and fund selectors look for differentiated exposures that can complement increasingly concentrated core equity allocations.

According to Aude Martin, ETF Specialist at L&G, investors are moving beyond broad thematic narratives and placing greater emphasis on exposure purity and portfolio construction discipline.

“We begin with a selective approach to identifying themes, assessing the industry size, economic rationale and the companies actively engaged in the theme,” according to Martin. “This selectivity helps us screen out trends to focus on long-term themes that have the potential to become the sectors of tomorrow.”

Purity of exposure becomes a priority

A growing concern for fund buyers is the significant overlap some thematic ETFs still have with traditional equity benchmarks, particularly within technology allocations dominated by mega-cap stocks.

L&G believes avoiding unintended exposure requires a combination of active research expertise, granular datasets and rigorous thematic definitions. This focus on thematic purity is becoming increasingly relevant for wealth managers seeking diversification away from concentrated market-cap-weighted indices.

Low overlap with traditional benchmarks, Martin argues, allows thematic ETFs to reduce concentration risk while still providing exposure to long-term structural growth trends. Thematic strategies can also broaden market-cap exposure within portfolios. L&G’s clean energy strategy, for example, has around 40% exposure to small- and mid-cap companies.
 

Portfolio Day 2026
Aude Martin will speak at Portfolio Day 2026 about “Thematic ETF’s with a focus on Technology and Energy & Resources”. Join us at Portfolio Day on Thursday, 10 September. Register here.

Active design and evolving themes

Fund selectors are also paying closer attention to how thematic strategies evolve over time, particularly in fast-moving industries such as AI, robotics and clean energy.

“Themes are evolving at a rapid pace,” Martin says. “A theme is meant to embody the long-term evolution of either emerging, or fast growing industries, and a portfolio should dynamically capture that.”

To address this, L&G uses what Martin describes as “active design”, supported by dynamic datasets that evolve alongside the industries the firm seeks to capture.

Within technology investing, Martin believes investors should look beyond traditional mega-cap exposure when assessing innovation strategies. In L&G’s AI and robotics strategies, the investment universe includes both technology enablers and industrial applications, helping diversify exposure across the broader innovation ecosystem.

Transparency also remains central to the due diligence process for professional investors, with ETF holdings publicly available on a daily basis.

Energy transition regains momentum

Energy transition strategies are also returning to focus amid geopolitical tensions and renewed concerns over energy security.

“The Iran conflict has, once again, underscored the fragility of global energy supply chains and reinforced the importance of energy security,” Martin says.

According to L&G, investors are increasingly seeking exposure across the renewable ecosystem, from clean energy infrastructure and battery storage to hydrogen technologies and battery-grade materials. Some investors are also accessing the theme through commodities, including energy metals and carbon exposure.

Methodology under greater scrutiny

As competition within thematic ETFs intensifies, index construction methodology is becoming a critical area of due diligence for professional fund buyers.

L&G argues that transparent methodology is essential because it determines both the composition of the portfolio and the scope of the theme itself. For allocators, understanding whether a strategy captures an entire value chain or only a narrow sub-segment is becoming increasingly important when comparing products.

The firm also sees its internal index construction expertise and long track record in thematic investing as important differentiators within an increasingly crowded ETF market.

Thematic ETFs become strategic portfolio tools

Looking ahead, L&G expects thematic ETFs to evolve further from tactical satellite allocations into strategic portfolio building blocks for wealth managers and institutional investors.

With valuations in traditional market-cap-weighted indices remaining elevated, demand is growing for differentiated exposures with lower benchmark overlap and access to long-term structural growth trends.

“Thematic ETFs have also earned significant track records, which creates confidence from a performance standpoint,” she concluded.

For fund buyers, the focus is no longer simply on capturing a market narrative. Increasingly, the emphasis is on transparency, targeted exposure and the role thematic ETFs can play in building more diversified portfolios.

Diversification does not guarantee against loss in declining markets.