Why Thematic ETF Issuers Should Be Worried About Prediction Markets

Trump just triggered a regime change in Venezuela. The Monroe Doctrine is suddenly back in fashion. A special operations raid on Caracas is broadcast across social media, Nicolás Maduro is remanded into U.S. custody to await trial, and Washington announces it will temporarily administer the country. No casualties. All eyes immediately turn to Venezuela’s oil reserves, and big energy firms start circling.

Overnight, ETFs react exactly as you would expect. Defense ETFs surged. Oil services names jump on expectations of infrastructure rebuilds and drilling activity.

The takeaway, at first glance, is comforting for ETF issuers. Thematic and sector investing still “works.” Despite higher fees, retail investors’ chronic mistiming, and the fact that many of these funds launch right as a trend peaks, capital still flows in when big macro events hit.

But here’s the uncomfortable truth. In 2026, it’s going to get much harder for issuers that rely heavily on thematic ETFs. Not because the products are useless, but because they are being quietly outcompeted by something far more direct: prediction markets.

I say this candidly as someone who works in the ETF industry and is watching behavior shift in real time, especially among investors under 30. On social media, younger millennials and Gen Z are increasingly skipping thematic ETFs altogether and expressing macro views through prediction markets instead.

What Is a Prediction Market?

A prediction market is a platform where participants trade contracts tied to the outcome of a specific, clearly defined event. Each contract typically settles at either $1 or $0 depending on whether the event occurs. Prices fluctuate before resolution based on perceived probability.

Two of the largest platforms today are Polymarket and Kalshi. While they differ in regulatory structure and plumbing, the mechanics are similar. You can buy or sell contracts on questions like whether a government action will occur, whether a rate cut will happen by a certain date, or whether a geopolitical event will escalate. Once the event resolves, contracts settle automatically.

Most of these markets are crypto-enabled or crypto-adjacent, which makes onboarding, funding, and settlement fast. More importantly, they strip away layers of abstraction. You are not buying a proxy via a security. You are betting directly on the outcome itself.

Why Prediction Markets Threaten Thematic ETFs

Prediction markets respond far more sharply to new information. When news breaks that increases the odds of a particular outcome, the price of the contract can move by double-digit percentages almost instantly. That level sensitivity makes it attractive.

During the Venezuela episode, contracts tied to U.S. intervention surged far more than any defense or energy ETF could reasonably deliver, even with two or three times leverage. ETFs dilute exposure across dozens of companies, balance sheets, and second-order effects. Prediction markets do not.

Thematic ETF investing also requires an inductive chain of reasoning. You start with an event. You infer which industries benefit. You decide which companies have the right exposure. You find an ETF that holds a reasonable basket, check liquidity and fees, and then hope the market agrees with your logic.

Prediction markets collapse that entire process into a single step. Search for the contract. Take a position. Yes, the payoff is binary. Yes, these markets are heavily arbitraged. But they are intuitive. And intuition matters. Gen Z, in particular, values clarity, speed, and the ability to enter and exit a trade without wading through prospectuses, holdings lists, and factor exposures.

The Future for Thematic ETFs

This is not an obituary. Personally, I don’t think sector ETFs are not going anywhere. Low-cost, market-cap-weighted sector funds, especially those charging under 10 basis points and covering the 11 GICS sectors, will remain core tools for asset allocation.

Large thematic ETFs are also likely safe. Funds with more than $1 billion in assets have scale, liquidity, and often capital gains that discourage investors from leaving. They have inertia on their side.

The problem is at the margin. Smaller thematic ETFs, especially those under $50 million in assets, and new launches chasing the latest narrative are heading into a brutal environment. They are no longer just competing with other ETFs. They are competing with prediction markets that offer faster, cleaner, and more emotionally satisfying ways to express a macro view.

If you are an ETF executive reading this, it may be time to slow down. The strategy of launching dozens of narrow thematic products and hoping a few stick looks far less viable in 2026. Between retail fatigue, fee pressure, and the rise of prediction markets, the throw-spaghetti-on-the-wall approach is running into some very hard limits.