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Illustration: Sarah Grillo/Axios

Happiness. Weed. Robots. Water. Whatever the theme, there's probably an ETF promoting a basket of stocks related to it.

Why it matters: Thematic ETFs are an investment mania side effect. There's newfound retail investor interest in narrow exposure to hot corners of the stock market. More are launching to meet the moment.

By the numbers: In the past quarter alone, inflows into thematic ETFs hovered close to all of last year's, per ETF data provider TrackerInsight.

  • The backdrop: More ETFs debuted in the U.S. last year than at any point in the past decade, according to Morningstar Direct data.

Catch up quick: Thematic ETFs have been around for years. Issuers are betting new pandemic-era traders want niche exposure to "crypto innovators," companies "highly supportive of Democratic candidates" (DEMZ) or professional sports.

  • "People are more risk tolerant in a low interest rate environment, they're willing to speculate," says Todd Rosenbluth, head of ETF and mutual fund research at CFRA.
  • There's the allure of investors whose names have become more popular on social media, like Cathie Wood — whose Ark Innovation Fund is a poster child for the thematic phenomenon. (It's also one of the biggest by assets.)
  • Issuers "can get into the game, but it's really hard to take market share from iShares or Vanguard or Invesco because they have everything covered," Drew Voros, editor-in-chief of ETF.com, tells Axios.

The big picture: Thematic funds "get a good amount of the new money coming in," but they're a really small slice of the ETF market, says Rosenbluth.

  • Thematic funds' assets under management have more than tripled, to roughly $133 billion, in the past year. That's about 2% of overall ETF assets.

What they're saying: The labels "may sound good, but you have to look under the hood to make sure it's not a marketing technique," and stuffed with stocks that run counter to its advertised mission, says Voros.

  • They also tend to charge a premium to what's available for broad market exposure. But as more "themes" get saturated with ETFs — there are seven for cyber security alone — the costs could come down.
  • Some of the funds can build up large holdings in companies that are barely traded, the FT reported earlier this year.

The intrigue: Thematic funds shed about $1.6 billion in assets in May, Bloomberg reports.

  • Some returns are down, too. Wood's flagship ETF declined more than 30% from its peak, in a swift reversal.
  • Returns for cloud computing and clean energy ETFs have also dropped after a stellar 2020, as CNBC notes.

What to watch: The one investment mania that's ETF-less? Bitcoin.

Driving the news: A slew of financial big wigs have applications in for bitcoin ETFs. U.S. regulators recently punted a decision on whether to allow them to later this summer.

  • The SEC warned Tuesday about the risk of mutual funds with exposure to the bitcoin futures market.
  • However, North America's first bitcoin ETF was approved in Canada earlier this year.

The bottom line: "If there's a theme that can be put into an ETF wrapper, it either already exists in an ETF wrapper — or it's under consideration," says Rosenbluth.

Go deeper

4 hours ago - World

Canada First Nation finds mass grave at another school site

A memorial around the Centennial Flame on Parliament Hill in Ottawa, Ontario, Canada, on June 4, honoring 215 Indigenous children found buried in an unmarked, mass grave at a one-time residential school in Kamloops, British Columbia. Photo: David Kawai/Bloomberg via Getty Images

A First Nation in Canada said Wednesday "hundreds" of unmarked graves have been discovered at the site of a former residential school in the prairie province of Saskatchewan.

Of note: The Cowessess First Nation said in a statement the number of graves found are "the most significantly substantial to date in Canada" — suggesting it's more than the remains of 215 Indigenous children discovered last month at a former residential school site in Kamloops, British Columbia.

Biden replaces FHFA director after Supreme Court ruling

Mark Calabria, then-director of the Federal Housing Finance Agency, during a Senate hearing on Capitol Hill in 2020. Photo: Astrid Riecken/ Pool/Getty Images

The White House on Wednesday replaced the regulator who oversees mortgage giants Fannie Mae and Freddie Mac, hours after a Supreme Court ruling enabled President Biden to oust the Trump appointee.

Why it matters: The removal of libertarian economist Mark Calabria as Federal Housing Finance Agency (FHFA) director gives Biden more control over the fate of Freddie and Fannie, "which play an outsize role in the housing market and are central to many homeowners' ability to afford homes," per the New York Times.

Sen. Sheldon Whitehouse under scrutiny for elite club affiliations

Sen. Sheldon Whitehouse during a Senate hearing on Capitol Hill in February. Photo: Susan Walsh-Pool/Getty Image

Sen. Sheldon Whitehouse (D-R.I.) said in a statement Wednesday that he is a member of an exclusive Rhode Island sailing club that lacks diversity.

Why it matters: Whitehouse has repeatedly spoken out against systemic racism and come under scrutiny this week for his family's affiliation with elite clubs. This is the second such club accused of lacking diversity that the senator has been linked to in recent days