Although a fraction of the scale seen in the US, the Australian market is tapping into major global trends with promising signs of growth.

Thematic exchange-traded funds (ETFs) in Australia have seen flows of around $600 million in 2024, with more than 40 products now available for local investors to choose from.

That marks significant growth from previous years, but remains modest compared to the U.S. market, which boasts a whopping $80 billion in thematic ETF assets and about 250 products spanning niches from pet care to K-pop.

But while thematic ETFs in the US represent just 1% of the entire ETF industry, thematic offerings in Australia make up more than 3% of the local market. This indicates greater penetration of thematic ETFs among Australian investors eager to engage with global megatrends.

Speaking to InvestorDaily, Global X investment strategist Mark Jockum highlighted that while the US market has seen some closures and outflows of thematic ETFs, Australia is experiencing a different trend.

"If you look at the U.S., we've actually seen a little bit more closings happening within some of the thematic ETFs, which is quite interesting," he said.

"They've actually seen runoff from their thematic ranges, they've had several months of runoff."

He attributes this to Australia's more globally oriented investment strategy, with global equity ETFs making up almost half of the local market. This preference is consistent with Australians' interest in thematic investments that offer targeted exposure to specific sectors or trends.

Jocum is optimistic about the future of thematic ETFs in Australia, noting that while the local market is about five to 10 years behind the US in terms of development, there is significant room for growth and innovation.

"I'm still seeing more innovation available, especially because Australians like to use ETFs for global exposure," he said.

"And while the broad vanilla ETF looks pretty saturated right now, there's room for innovation there, but there's a lot more room for innovation in thematic ETFs."

Is there a theme boom coming?

Thematic ETFs boomed in 2021, attracting more than $2.2 billion and making up 10 percent of total market flows.

"There were a lot of launches around thematic ETFs ... We were in a zero-rate interest rate environment, so that fueled that cycle of innovation," Jocum said.

However, interest waned in 2022 and 2023. due to rising interest rates and inflation. "Last year, thematic ETFs only made up about 1% of flows, so we've almost seen that tripling and a bit of a resurgence in thematic ETFs, which is really encouraging."

Looking ahead, Jocum said he believes the current macro environment will be favorable for thematic ETFs.

"Year to date, we are at about 600 million [in flows]so it's about a third of where that peak used to be," Jocum said. "I think the resurgence of theming will continue."