XEQT vs Thematic ETFs: Why Boring Beats Trendy Every Time

It was a backyard barbecue in the summer of 2021 and my buddy Marcus could not stop talking about his portfolio. He had just loaded up on a clean energy ETF – I will not name the exact fund, but you have probably heard of it – and he was up something like 140% in under two years. He was holding his beer with one hand, waving his phone screen in my face with the other, showing me these beautiful green numbers. “This is the future, man. Fossil fuels are dead. Every government on the planet is going green. This thing is going to 10x.”

I mentioned I was mostly just buying XEQT every two weeks through Wealthsimple. He looked at me the way you might look at someone who tells you they still use a flip phone. “You’re leaving so much money on the table,” he said.

Fast forward to today. That clean energy ETF is down roughly 60% from its 2021 peak. Marcus sold most of it in late 2022 after the pain became unbearable. He took a massive loss. Meanwhile, my boring XEQT – the same fund he pitied me for owning – has delivered steady, positive returns through the same period. No drama. No stomach-churning drops. Just quiet, compounding growth across 12,000+ stocks worldwide.

Marcus is a smart guy. He simply fell for one of the most seductive traps in investing: the thematic ETF.

This post is about why that trap exists and why XEQT’s boring, all-world approach consistently beats the flashy alternative for Canadian investors building long-term wealth.

1. What Are Thematic ETFs?

A thematic ETF is an exchange-traded fund built around a specific trend, sector, or “theme” rather than a broad market index. Instead of owning a slice of the entire global stock market (like XEQT does), a thematic ETF concentrates your money into companies tied to one particular narrative.

Some popular themes over the past decade include:

• Artificial intelligence and robotics (e.g., ROBO, BOTZ, IRBO)
• Clean energy and solar (e.g., ICLN, TAN, QCLN, HCLN)
• Blockchain and cryptocurrency (e.g., BLOK, BKCH)
• Cannabis (e.g., HMMJ, MJ)
• Space exploration (e.g., ARKX, UFO)
• Genomics and biotech (e.g., ARKG)
• Cybersecurity (e.g., HACK, CIBR, BUG)
• Metaverse and gaming (e.g., META, ESPO)
• Electric vehicles (e.g., DRIV, KARS)
• Water and agriculture (e.g., PHO, FIW)

The list keeps growing. Every year, fund companies launch new thematic ETFs to capture whatever narrative is dominating headlines. If something is trending on social media and making people excited, there is almost certainly an ETF for it – or one on the way.

In Canada, we have had our own wave of thematic products. The Horizons Marijuana Life Sciences Index ETF (HMMJ) became enormously popular in 2017-2018 during the cannabis legalization hype. More recently, funds focused on AI, clean energy, and blockchain have attracted billions in Canadian investor dollars.

The common thread: they all promise to help you invest in “the future.” And that promise is incredibly hard to resist.

2. The Appeal of Thematic ETFs: Why They Are So Tempting

Let me be honest – I understand the appeal. Thematic ETFs are genuinely exciting in a way that XEQT will never be. Here is why they pull so many investors in:

They Tell a Compelling Story

Human beings are wired for narrative. We do not process spreadsheets of data; we process stories. And thematic ETFs come packaged with the best story in investing: “The world is changing, and here is how you profit from the change.”

AI is going to transform every industry. Clean energy is going to replace fossil fuels. Blockchain is going to revolutionize finance. These are not crazy predictions – many of them are probably correct. The story feels obvious. It feels inevitable. And when something feels inevitable, it feels like a sure bet.

They Feel Like Investing in the Future

Buying XEQT feels like you are buying… everything. Banks, oil companies, boring consumer staples, random Japanese industrial firms. It does not feel visionary. It does not feel like you are making a bold call.

Buying an AI ETF feels like you are planting a flag on the right side of history. You are not just investing; you are making a statement about where the world is headed. That feeling of conviction is addictive.

Social Media Hype and FOMO

This is the big one. In the TikTok and Reddit era, thematic ETFs spread like wildfire. Someone posts their 200% return on an ARK fund. It gets 50,000 likes. A Canadian finance influencer does a video called “This ETF Will 10x by 2025.” It gets a million views. Suddenly, everyone in your office is talking about it.

The fear of missing out is one of the most powerful forces in finance. When your coworker is up 80% on something you do not own, it is almost physically painful. You start questioning your boring XEQT strategy. Maybe they know something you do not.

Past Performance During a Boom

The final hook: thematic ETFs usually launch (or gain popularity) during the boom phase of their theme. So by the time you hear about them, the returns look spectacular. The chart is a rocket ship. The fund fact sheet shows 50%, 80%, 120% returns. It is intoxicating.

What you do not see is that those returns are largely behind you. You are arriving at the party just as the hosts are cleaning up.

3. The Problem with Thematic ETFs: What the Data Actually Shows

Here is where the excitement meets reality. The data on thematic ETF performance is not just disappointing – it is damning.

Most Thematic ETFs Underperform Broad Market Indexes

A 2022 study by Morningstar found that only about one in four thematic funds that existed at the start of a 15-year period survived and outperformed the global stock market. That is a 25% survival-and-success rate. Three out of four either closed entirely or trailed a simple global index.

A separate analysis by Morningstar in 2024 found that the average dollar invested in thematic ETFs lost money over the prior five years, even though the funds themselves sometimes showed modest positive returns. Why? Because investors poured money in at the peak and pulled money out at the bottom. The average investor experience was far worse than the fund’s reported return.

They Launch After the Theme Has Already Run Up

This is the structural problem with the entire thematic ETF industry. Fund companies are businesses. They launch products when there is demand. And demand peaks when a theme is already hot – which means the stocks in the ETF are already expensive.

Think about it:

• Cannabis ETFs launched and attracted the most money in 2017-2018, right before the sector crashed
• Clean energy ETFs saw massive inflows in 2020-2021, right before the sector crashed
• AI ETFs started attracting huge money in 2023, after NVIDIA had already gone up 200%+
• Blockchain ETFs peaked in popularity in late 2021, right before crypto crashed

The pattern is remarkably consistent. By the time there is enough buzz for a fund company to package a theme into an ETF and for regular investors to hear about it and buy in, the easy money has already been made.

Higher Fees Eat Your Returns

Thematic ETFs typically charge 0.40% to 0.70% in management expense ratios (MERs). Some charge even more. XEQT charges 0.20%.

That might not sound like a big difference, but over a long investing career, it is enormous. On a $200,000 portfolio over 30 years, the difference between a 0.20% MER and a 0.60% MER – assuming the same gross returns – is roughly $60,000 to $80,000 in lost wealth. That is real money, silently drained from your account to pay for the privilege of owning a narrower, riskier fund.

Concentrated Risk Means Bigger Drawdowns

XEQT holds over 12,000 stocks across every sector and geography on the planet. If one company collapses, you barely notice. If one entire sector crashes, your other sectors absorb the blow.

A thematic ETF holds 30 to 80 stocks, all in the same narrow space. When the theme falls out of favour – and eventually every theme does, at least temporarily – there is nowhere to hide. Every stock in the fund drops together.

The ARKK Case Study: A Cautionary Tale

No discussion of thematic ETFs is complete without talking about ARK Innovation ETF (ARKK), managed by Cathie Wood.

ARKK is the poster child for everything that can go right and then go terribly wrong with thematic investing:

• From its 2014 launch through early 2021, ARKK delivered jaw-dropping returns. It was up over 150% in 2020 alone.
• By February 2021, ARKK’s assets under management had ballooned from about $1.5 billion to over $28 billion as investors stampeded in.
• Then it crashed. From its peak in February 2021 to its trough in late 2022, ARKK fell approximately 75-80%.
• Because most of the money flowed in near the peak, the average ARKK investor lost a massive amount of money even though the fund’s since-inception return was still technically positive.

The cruel math of thematic ETFs: $1 billion invested early made great returns. The $26+ billion that poured in at the top got crushed.

Performance Comparison: XEQT vs Popular Thematic ETFs

Here is how XEQT stacks up against some well-known thematic ETFs. These are approximate total return figures (in CAD) that illustrate the general pattern:

Note: Figures are approximate ranges based on historical performance through early 2026, expressed in CAD. Past performance does not guarantee future results. Always verify current data before making investment decisions.

The pattern is clear. Some thematic ETFs have good stretches – BOTZ has benefited from the AI boom, for instance – but even the better-performing ones tend to trail XEQT when you account for their higher fees and the time periods when their theme was out of favour. And the worst performers absolutely devastated investor portfolios.

4. The Innovation Paradox: Great Technology Does Not Mean Great Returns

This is the part that trips up even sophisticated investors. The logic seems airtight: “AI is going to change the world, therefore AI stocks will go up, therefore an AI ETF is a great investment.”

But history shows us, over and over again, that revolutionary technology and great investment returns are not the same thing.

The Railroad Boom (1840s-1850s)

Railroads genuinely transformed civilization. They connected cities, enabled commerce, and built modern economies. They were also one of the most destructive investment themes of the 19th century. Hundreds of railroad companies were formed. Most went bankrupt. Investors who bought into “the future of transportation” overwhelmingly lost their money, even though the underlying technology was world-changing.

The Dot-Com Bubble (1999-2000)

The internet really did change everything. Every optimistic prediction about e-commerce, digital communication, and online services came true – and then some. But investors who bought internet stocks in 1999 and 2000 mostly got destroyed. The Nasdaq fell nearly 80% from peak to trough. Companies like Pets.com, Webvan, and eToys vanished entirely. Even Amazon – one of the greatest business success stories in history – dropped 94% from its 2000 peak before recovering.

The Clean Energy Bubble (2007-2008)

Solar and wind energy were going to replace fossil fuels. That narrative was correct. Solar energy costs have plummeted and adoption has soared. But the clean energy ETFs that launched in 2007-2008 saw most of their holdings crash. Many of the early solar companies went bankrupt as the industry consolidated. Investors who bought the “clean energy revolution” in 2007 and held on would have waited over a decade just to break even.

Why Does This Keep Happening?

The answer is deceptively simple: by the time a theme is obvious enough for an ETF, the market has already priced in the opportunity.

Stock prices reflect future expectations, not current reality. When everyone agrees that AI is going to be massive, AI stock prices already reflect that expectation. For the stocks to keep going up, AI has to be even more massive than everyone already expects. That is a much harder bet to win.

There is also a survivor bias problem. In most technology revolutions, a small number of winners capture almost all the value while the majority of companies fail. An AI ETF owns NVIDIA, sure, but it also owns dozens of speculative AI companies that may never turn a profit. The winners’ gains get diluted by the losers’ crashes.

5. XEQT vs Thematic ETFs: The Complete Comparison

Here is a detailed look at how XEQT stacks up against a typical thematic ETF across the dimensions that actually matter for long-term wealth building:

The bottom row is one that people miss. XEQT is not a fund that ignores innovation – it is a fund that automatically captures innovation winners without requiring you to predict them in advance. When NVIDIA exploded in value thanks to AI, XEQT holders benefited because NVIDIA’s weight in the index grew. You did not have to be smart enough to buy an AI ETF at the right time. You just had to own the market.

6. Why XEQT Already Gives You Exposure to Every Major Theme

One of the biggest misconceptions about XEQT is that it is somehow “missing out” on the exciting themes. This is flat-out wrong. XEQT, through its underlying index funds, holds virtually every major publicly traded company on Earth. That means:

AI and Technology?

XEQT holds NVIDIA, Microsoft, Alphabet (Google), Meta, Amazon, Apple, AMD, Broadcom, TSMC, and every other significant AI company. These are among XEQT’s largest holdings by market cap. You are not missing the AI revolution – you are invested in it, alongside everything else.

Clean Energy?

XEQT holds NextEra Energy, Enphase, First Solar, Vestas Wind Systems, Iberdrola, and hundreds of other companies involved in the energy transition. You also own the traditional energy companies investing billions in renewable capacity.

Cybersecurity?

XEQT holds CrowdStrike, Palo Alto Networks, Fortinet, Zscaler, and every other publicly traded cybersecurity leader. If cybersecurity becomes a $500 billion industry, you benefit.

Blockchain and Fintech?

XEQT holds Coinbase, Block (Square), PayPal, Visa, Mastercard, and every other fintech company that matters. If blockchain transforms finance, the winners will grow in XEQT’s index.

Electric Vehicles?

XEQT holds Tesla, BYD, Rivian, Li Auto, plus every traditional automaker investing in EVs like Toyota, Volkswagen, Ford, and GM.

Genomics and Biotech?

XEQT holds Illumina, Moderna, CRISPR Therapeutics, Vertex Pharmaceuticals, and hundreds of other biotech firms.

The point is this: you do not need a thematic ETF to invest in any of these themes. You already own the leaders through XEQT. The difference is that with XEQT, you do not have to predict which theme wins. If AI is the dominant investment story for the next decade, great – you own it. If it turns out to be cybersecurity, or biotech, or something nobody is even talking about yet, you own that too. XEQT is a bet on human progress across every dimension, not a bet on one specific flavour of progress.

7. When Thematic ETFs Might Make Sense (Being Fair)

I want to be balanced here. I am not saying thematic ETFs are always terrible for everyone. There are situations where they might have a place in a portfolio:

As a Small Satellite Position

If you have a solid XEQT core – say 90% of your portfolio – and you want to allocate 5-10% to a thematic ETF because you genuinely believe in the theme and find it intellectually interesting, that is not unreasonable. The key word is “small.” Your core has to be the boring, diversified foundation. The thematic position is play money with rules.

If You Have Genuine Expertise

If you are a cybersecurity professional who deeply understands the industry landscape, maybe – maybe – a cybersecurity ETF gives you a slight edge. You might understand which sub-trends are real and which are hype. Even here, though, the track record suggests that sector expertise does not reliably translate into investment outperformance. But at least you are making an informed bet rather than following a TikTok trend.

If You Understand and Accept the Risks

Some investors genuinely enjoy the volatility. They find it engaging. They can stomach a 50% drawdown without panic selling. If that is you, and you fully understand that your thematic position might underperform XEQT for years or decades, then go ahead. Just be honest with yourself about whether you will actually hold through the pain or whether you will bail at the worst possible moment like most thematic ETF investors do.

My Honest Recommendation

Even in these scenarios, I would push back gently. Every dollar in a thematic ETF is a dollar not in XEQT, and over the long run, XEQT has a higher probability of delivering solid risk-adjusted returns. You are essentially paying a higher fee for more concentrated, more volatile exposure to companies you already own through XEQT. If you really want a thematic bet, consider buying individual stocks in the sector – at least you are not paying a 0.50%+ MER for the privilege.

8. The Graveyard of Thematic ETFs You Have Already Forgotten

One of the most telling things about thematic ETFs is how many simply disappear. Fund companies quietly close underperforming funds, and the industry conveniently forgets they existed. This is survivorship bias, and it makes the remaining thematic ETFs look far better than the category as a whole.

Remember cannabis ETFs? HMMJ was the hottest thing in Canadian investing in 2017-2018 – now down 70-85% from its peak. 3D printing ETFs launched around 2013-2014 promising to “change manufacturing forever” – most no longer exist. Social media ETFs from the early 2010s? Quietly closed. Metaverse ETFs from 2021-2022? Struggling badly after the hype faded.

Each theme had a compelling story. Each attracted real money. Each left most investors worse off than a simple index fund. The failures get memory-holed – you only hear about the one thematic ETF that worked, creating the illusion that thematic investing is a winning strategy.

9. The Psychology Behind the Trap

Understanding why thematic ETFs underperform is one thing. Understanding why investors keep buying them anyway is equally important. Four biases do most of the damage:

Narrative bias: We trust stories more than statistics. “AI is transforming everything” is a story. “Global equities return 8-10% annualized” is a statistic. The story wins, even though the statistic is more useful.

Recency bias: If an AI ETF is up 60% in the past year, we project that forward. In reality, assets that have run up sharply tend to revert toward the mean.

The Dunning-Kruger effect: After reading a few articles, investors develop a false sense of sector expertise. But understanding a technology trend and knowing which stocks will profit from it are completely different skills. Even full-time venture capitalists get it wrong more often than right.

Social proof: When everyone around you is buying something, it feels safe. In reality, broad consensus is one of the best contrarian indicators in finance. By the time “everyone” agrees a theme is the future, prices have already adjusted.

10. Conclusion: XEQT Is the Anti-Thematic ETF, and That Is Exactly Why It Works

XEQT does not tell a sexy story. It does not make for exciting conversation at a barbecue. Nobody is going to post their XEQT returns on TikTok with fire emojis.

And that is exactly why it works.

XEQT is a bet on the totality of human economic progress. It says: “I do not know which theme will dominate the next decade, but I know that the global economy will grow, and I want to own all of it.” That humility – that willingness to admit you cannot predict the future – is the single most valuable edge a retail investor can have.

Every theme that works? XEQT owns it. Every theme that fails? XEQT’s exposure is so small and so diversified that the impact is negligible. You capture the upside of every innovation without concentrating your risk on any single one.

Meanwhile, you are paying 0.20% in fees instead of 0.50-0.70%. You are holding 12,000+ stocks instead of 40. You are diversified across every sector and every geography instead of being all-in on one narrative. And because XEQT is boring, you are far less likely to panic sell during a drawdown – because there is no theme-specific crisis that makes you question whether the entire thesis has collapsed.

My buddy Marcus? He is back to investing. He learned an expensive lesson. He now has a TFSA full of XEQT, and he says it is the best financial decision he ever made. Not the most exciting. But the best.

If you are tempted by the latest thematic ETF – AI, quantum computing, space exploration, or whatever is dominating headlines when you read this – I am not going to tell you it is stupid. But before you buy, ask yourself one question:

Would I rather own the next big thing, or own everything and let the market figure out what the next big thing is?

XEQT is the second option. And over a 20, 30, or 40-year investing career, the second option wins almost every time.

Disclaimer: This post is for informational purposes only and does not constitute financial advice. Past performance does not guarantee future results. Always do your own research and consider consulting a qualified financial advisor before making investment decisions. I am not a financial advisor. The referral link above supports this blog at no cost to you.