A Look at the Thematic Funds That Offer a Sustainable Focus

Thematic funds aim to capitalize on emerging investment opportunities by creating portfolios that align with specific trends or themes. Instead of investing in a single stock related to a trend, investors can buy shares of a thematic fund, with the advantage of diversification.

This diversification includes not only companies directly involved in the trend but also suppliers, service providers, and other companies that benefit from the changes brought about by the trend. In addition to a potential opportunity to boost returns, thematic funds provide a distinct way to identify and reduce risk.

When it comes to identifying ways to reduce ESG risk, investors can explore funds with different kinds of sustainable focus, such as alternative energy, clean technology, and water.

Here, we take a closer look at the funds available in resource management and energy transition themes.

Water funds and alternative energy funds account for the lion’s share of sustainable thematic funds. Other themes that make up a smaller portion of the thematic funds’ universe include clean tech, wind, rare resources, and energy transition.

The sheer length of time they’ve been around for is a driving reason for the prominence of water funds, which make up a plurality of funds under the Resource Management theme. The largest water funds in North America include the following as of April 10, 2025:

• Invesco Water Resources ETF PHO at $2.0 billion.
• First Trust Water ETF FIW at $1.6 billion.
• Invesco S&P Global Water ETF CGW at $810.9 million.
• Virtus Duff & Phelps Water Fund AWTIX at $519.7 million.
• Calvert Global Water Fund CFWAX at $513.4 million.

Alternative energy funds aim to capitalize on the transition to a low-carbon economy. Though these funds are particularly popular in Europe, they’re still a powerful presence in North America. The grouping got a huge boost in late 2020 when newly elected US President Joe Biden pledged billions of dollars of government support for green infrastructure. Since then, waning enthusiasm for sustainable investments has contributed to falling assets and significant net outflows, particularly in the year ended June 2024.

The largest alternative energy funds in North America include:

• iShares Global Clean Energy ETF ICLN at $1.3 billion.
• First Trust NASDAQ Cln Edge GrnEngyETF QCLN at $370.2 million.
• Fidelity Select Environment and Alternative Energy FSLEX at $483.0 million.
• Invesco Wilderhill Clean Energy ETF PBW at $197.1 million.
• ALPS Clean Energy ETF ACES at $227.7 million.

North American leaders in thematic funds with a sustainable focus include iShares, First Trust, and Invesco.

The Morningstar Sustainability Rating evaluates a fund’s ESG risks and enables investors to directly compare funds on this front. The rating measures funds on a scale of 1 to 5 globes, with 1 globe indicating high ESG risk and 5 globes indicating low ESG risk.

A few funds from the list of thematic funds that stand out as of April 10, 2025 include:

• First Trust NASDAQ Cln Edge StGidIfsETF GRID, in the Clean Tech category, holds $2.0 billion in AUM and has a 5-globe rating.
• iShares Global Clean Energy ETF ICLN, within the Alternative Energy theme, has $1.3 billion in AUM and a 4-globe rating.

• First Trust Global Wind Energy ETF FAN, under the Wind theme, has $1824.0 million in AUM and a 4-globe rating.

Though thematic funds are often used with the hopes of boosting returns over the investment period, they can also help investors reduce portfolio risk—including ESG risk.

And by understanding the different ways that ESG risk can take shape according to funds’ different focuses, investors can be more intentional about where they put their money and the ESG factors that funds are prioritizing. For instance, they can replace traditional energy sector exposure with alternative energy funds.

For the full analysis of ESG thematic funds around the world, download the report.