What is Thematic Investing?
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Many of you have heard the term “thematic investing” and may have wondered what it means. Thematic investing is a fancy way of saying that you want a long-term investment based on a theme (i.e., idea or trend) that you believe will grow in importance.
Typically, these themes have the potential to change society, the economy or technology. Sometimes the changes may be so extreme that one day they could disrupt the normal way of doing business (i.e., disruptive themes). Thematic investments often focus on emerging technologies, the needs of demographic groups (such as an aging society) or societal trends.
These investments are not for short-term traders because it can take years or decades for these themes to unfold and become profitable (if they ever do). It takes patience to hold these investments for a long time period.
Kenneth Lamont, senior manager research analyst for Morningstar, put it this way: “Thematic investing allows you to express your views and align your interests and beliefs. Simply put, you are targeting future changes. You try to profit from these structured themes that tend to transcend the traditional business cycle.”
The AI thematic success story
One of the most successful thematic investments in recent history is artificial intelligence. It’s hard to miss the spectacular success of stocks related to AI, most notably Nvidia , but also Microsoft, Google, and Apple. Cryptocurrencies is another thematic investment that has received a lot of media attention.
Because of the success of the AI and bitcoin themes, interest in thematic investments has surged, attracting billions of dollars in investments.
In reality, thematic investments often have hot and dry spells. In the short-term, these stocks may be very volatile, both up and down. Although technology-themed investments are extremely popular right now, in a few years, or sooner, technology may fall out of favor as other themes take its place.
Although it is true of any investment, it is difficult to predict which thematic investments will do well over time and which may falter. Thematic investors are willing to wait for the theme to play out and generate large profits.
Let the pros do the work
The big question is, how do you find a thematic investment that reflects your values while also boosting your returns? Unfortunately, there is no easy answer, but you have several choices.
First, you can do your own research. Unfortunately, it takes a lot of time to review research reports, read news stories and study analyst ratings. Not everyone has the time to do-it-yourself, so for most investors, it’s easier and more practical to invest in mutual funds or exchange-traded funds that are designed for a particular theme.
You can still invest according to your convictions while letting a professional money manager find the right stocks. Be sure the stocks included in the fund reflect your values and goals, and the fund is doing as well as competitive funds, or at least as well as its benchmark. In addition, you also want to be sure the expense ratio is reasonable (avoid certain specialized funds that charge ridiculously high fees or expenses).
This also means you are limited only to what the mutual fund or ETF companies have to offer, but luckily, there has been a dramatic increase in choices over the last decade.
Making a thematic investment
Let’s say you are interested in one of these ideas: water sustainability, renewable, clean, or green energy, diversity in the workplace, electric vehicles, social networking, cyber security, blockchain, e-commerce, or a social, environmental or governance theme. To invest in one of these ideas or themes, you may buy an ETF, mutual fund or individual stock. Some brokerage firms offer a preselected package of stocks that reflect that theme.
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For example, brokerage firm Charles Schwab allows clients to select among 40 different themes such as “pet passion,” “renewable energy,” “water sustainability,” “workforce diversity leaders” and “active lifestyle,” to name just a few.
How to find thematic-based ETFs and mutual funds
To find ETFs and mutual funds that reflect the theme or idea you want to invest in, use a search engine. For example, to find ETFs that include stocks in companies that want to develop clean water, type “top-rated water sustainable ETFs.” A list of ETFs will be displayed. Here is a sample list of ETFs (which are not recommendations):
Invesco S&P Global Water Index ETF
Global X Clean Water ETF
Ecofin Global Water ESG Fund
iShares MSCI Water Management Multisector ETF
A list of other top-rated ETFs and mutual funds from independent news sources may also appear. Before buying, be sure to do your homework. It’s always a good idea to start with a small sum of money when buying for the first time. That gives you time to monitor the investment and decide whether it makes sense to keep holding it.
Changing the world
Hopefully, you have a better idea of what it means to be a thematic investor. There is little doubt that thematic investing will continue to attract more interest as people grow more concerned about the environment and social issues, and try to predict future technological trends. As long as you are aware of the potential risks, investing in your beliefs makes sense for many investors.
As thematic investing gains in popularity, some people will decide “to put their money where their mouth is,” as the saying goes. Or as Morningstar research analyst Lamont says: “You are looking for a theme that is going to change the world and allow you to profit as the theme develops.”