The exchange-traded fund (ETF) universe has undergone explosive growth since the first prototype fund was launched in 1990. But within this broad category, there is a niche segment that has gained a lot of traction in recent years. I'm talking about thematic ETFs, which focus on specific themes or sectors that are expected to benefit from long-term trends.

Some examples of these themes are artificial intelligence (AI), semiconductors, and advanced medical devices. Many individual stocks and ETFs based on these specific themes have dramatically outperformed the overall market over the past 10 years.

A doctor inspecting a digital X-ray.

Image source: Getty Images.

Which thematic ETFs should you consider buying as we enter 2024? I prefer funds that invest in areas that have exceptionally strong growth prospects, such as biotechnology, the U.S. medical device industry, and semiconductors. Here is an overview of three ETFs that offer exposure to these powerful themes and have a track record of delivering solid returns.

1. Biotechnology

Founded in 2006, the SPDR S&P Biotech ETF (XBI -2.86%) is one of the most popular and liquid biotech ETFs in the market. It tracks the S&P Biotechnology Select Industry Index. The XBI tends to provide greater exposure to small- and mid-cap biotechs than other biotech ETFs.

This tilt toward smaller, cash flow-negative companies has caused the XBI to be extremely volatile over its history, illustrated by the fact that this biotech ETF has crushed the S&P 500 over several multiyear stretches during its 17-year history, but it has still managed to badly underperform this benchmark index over the past 10 years.

^SPX Chart

^SPX data by YCharts

Because of its emphasis on smaller companies, the XBI does not always pay a dividend. However, it does have a fairly low expense ratio for its category of 0.35%. The XBI also once hit peak total returns of 800% in 2021, before biotech as a whole entered a prolonged bear market. As biotech remains a hotbed of innovation, I suspect the XBI will bounce back in a big way.

2. Medical devices

The iShares U.S. Medical Devices ETF (IHI -0.28%) is a fund that focuses on companies that produce and sell medical devices such as heart monitors, valves, artificial joints, and surgical tools. It tracks the Dow Jones U.S. Select Medical Equipment Index, which chooses companies based on their market capitalization and relevance to the theme.

The IHI is a cost-effective ETF with an expense ratio of 0.40% and a modest yield of 0.52%. It has also outperformed the S&P 500 by a wide margin since its inception in 2006 (see graph).

I believe this outperformance will persist in the coming years because of three main factors: an aging U.S. population, expanded access to healthcare in the country, and the remarkable level of innovation occurring in the healthcare sector right now. Medical device sales, in brief, are poised to continue to grow at a breakneck pace in the years ahead, which is a favorable trend for medtech-focused ETFs like the IHI.

IHI Total Return Level Chart

IHI Total Return Level data by YCharts

3. Semiconductors

Launched in 2011, the VanEck Vectors Semiconductor ETF (SMH -0.97%) invests in companies that design, manufacture, or distribute semiconductors or semiconductor equipment. It tracks the MVIS U.S. Listed Semiconductor 25 Index, which selects 25 of the largest, most liquid U.S.-listed semiconductor companies. The SMH has a moderate expense ratio of 0.35% and a decent yield of 0.75%, and it has vastly outperformed the S&P 500 over the prior 10 years.

^SPX Chart

^SPX data by YCharts

Given the strong demand for chips capable of powering the AI revolution, I think semiconductor stocks are more likely than not to continue their market-beating ways over the next 10 years. And while buying individual names certainly isn't a bad idea, based on the parabolic growth potential of AI, the SMH is a straightforward, hassle-free way to gain exposure to this unstoppable trend.