Thematic investing is being touted as the latest revolution in investment. So how does it work? Today we break down its core concepts for you and help stay ahead of the evolving investment industry and its trends.
What is Thematic Investing?
Traditional investing focuses mainly on the here-and-now, or what is. There’s no focus on building your portfolio around specific concepts. Instead, you take a selection of what works and what is delivering gains in the risk profile you prefer.
Thematic investing, on the other hand, looks at the long-term trends and is built around-you guessed it- core themes. It really is that easy. Thematic investing, you see, isn’t any type of new product, but rather a different way to approach the markets and how you create your portfolio.
In turn, it creates more of a future-focused environment, in which you influence structural changes and the way the world works as well as the return figures of your investment portfolio. When combined with the motivation to make a change in the world, thematic investing becomes a type of impact investing. It is the practice of investing money into businesses that are deemed to have a positive social or environmental impact.
Impact investing can take many forms, including direct investments into companies that aim to tackle social and environmental problems, as well as more indirect investments in companies that support initiatives aimed at tackling those problems.
Thematic Investing Examples
These themes can be anything. In fact, socially responsible investing, which we’ve looked at before, is simply a subset of thematic investing. You can find thematic portfolios on offer for anything from plant-based steaks to robotics and AI, biotech, and beyond. You can select what resonates with you and place your investment money accordingly. Here are some examples:
Renewable energy: Investing in companies that produce or are focused on using renewable energy sources such as wind, solar, hydroelectric, and geothermal power.
Biotech: Both pharmaceuticals and biotech devices can be considered in this category. Biotech companies are focused on life sciences and often deal with areas such as regenerative medicine through genetic engineering and even artificial organ development.
Healthcare: Healthcare has become a global issue, especially as the world’s population ages. Healthcare companies provide services and technology focused on health, safety, and curing existing diseases.
Sustainable food: This includes all food that uses fewer resources and has a lower carbon footprint.
Automation and robotics: This includes everything from automation in the workplace to autonomous vehicles and AI.
Clean water: Companies or projects focus on the sustainable supply of clean water which is a growing challenge for the world’s population.
Cybersecurity: The Internet of Things, the cloud, AI and other technological advancements have created an ever-growing need for more secure Internet and technology.
Education: Education sector-focused portfolios can include stocks of online learning and skill development platforms and enterprises that are focused on helping people advance their careers and businesses as well as traditional educational establishments.
Virtual reality: VR is a hyper-growth industry with applications in many businesses and industries.
How are trends selected?
Of course, the portfolio managers for thematic investing products don’t simply pluck ideas out of the air. Thematic investments are created by following themes and trends expected to boom into the future. It could focus on societal trends and changes, tech evolution, economics, or even the growth of specific regions of the globe.
They also need to establish if this trend is for the short-term or long-term. How changes in the trend will impact other areas of investment? And whether it’s structural or speculative.
Then it is a matter of bringing in ETFs, stocks, bonds and other financial products that offer direct or indirect exposure to the chosen trend. This could be through direct industrial involvement, or through services, business models, demographics, and product lines.
From there, the standard parameters of risk, liquidity, performance, quality of management, earnings estimate, and so on will be used to determine the strongest picks for the portfolio.
Benefits of thematic investing
At the end of the day, thematic investing is just another investment strategy. It is, however, a bit different from traditional models. You choose companies and trends that don’t merely expect to deliver financial results but also resonate with you.
This, in turn, makes it easier to take Warren Buffet’s famous advice- invest in what you understand. For an engaged investor, that understanding of the sector could also lead to you making smarter investment decisions down the line. Let’s face it- it’s also easier to enjoy investing when you feel connected to the products.
You can follow long-term trends that empower your vision of the world you want to help shape, as well as make money. Plus, of course, if you choose wisely, the growth of your trend and the growth of your portfolio will go hand in hand for a brighter future.
Thematic investing and ETFs
Once we saw the ETF market gain traction and diversify past tracking the top 40 for each stock exchange, it was almost inevitable that thematic investing and the ETF would begin to work synergistically together. Thematic investing inevitably creates a host of benchmarks- the exact thing ETFs can be utilized to track.
A thematic ETF is an investment vehicle that attempts to track the performance of a particular theme, such as healthcare, robotics, or renewable energy. Thematic ETFs are designed to invest in the stocks of companies that are part of the overall theme. As with other types of ETFs, thematic ETFs can be purchased in both large and small sizes. Like other exchange-traded funds (ETFs), these funds are traded on public markets like stocks.
ETFs offer investors exposure to a specific market segment without the need for constant active management. ARK Innovation ETF, Global X Robotics & Artificial Intelligence ETF and iShares Global Clean Energy ETF are among the largest thematic ETFs in the world.
ETFs aren’t the only thematic investment products, however. You will find mutual funds and ‘bouquets’ of stock offerings on thematic lines, too.
Should I choose thematic investing?
This is a question as unique as you are, and there’s no set answer. Thematic investing simply gives you another stock selection approach you can leverage in your portfolio.
There are a few things to remember, of course. On the plus side, if you want to understand how your investment works, or have a strong core set of values you want to carry forward into positive change in the world, thematic investing will align with those goals very easily.
On the other hand, if you only focus on a single sector it may result in an undiversified portfolio. This can present a riskier investment profile than traditional investment strategies. That goes double if many small-cap stocks are represented in the index, fund, or stock pick. While great rewards can come from small-cap stocks in the right industry, they also carry the most risk.
Volatility, in particular, can become a problem for thematic investors, so if you do opt to adopt this strategy, you should focus on long-term investment and staying the course, rather than trying to time the markets.
Bottom Line
Thematic investing is an intriguing way to harness the power of long-term trends and make them work for your financial future. It also offers investors with a conscience or strong set of values a great way to bring that into their investment strategy.
Whether or not individual thematic investment products appeal to you, of course, is a matter for you to decide, but they are well worth consideration in any holistic investment strategy.
An accomplished financial analyst and writer, holds a Master’s degree in Finance from the University of Exeter, bringing his expertise to guide readers through the world of financial markets and investment strategies.
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