Thematic Investing: Definition and Basics

As an investor, you might find yourself drawn to causes or trends that align with your values or shape the future. Thematic investing lets you target emerging technologies, demographics, or sectors that reflect those interests while positioning your portfolio to benefit from the long-term growth these trends can drive.

This article offers a comprehensive overview of thematic investing and outlines the common categories shaping today’s market. We’ll also examine where this approach fits within an overall portfolio and its potential benefits and drawbacks. Finally, we’ll outline steps for getting started with thematic investing.

Understanding Thematic Investing

Thematic investing is the concept of investing in macro-level trends, patterns, or technologies that have the potential to shape the future. This can apply to individual stocks/firms, mutual funds, or exchange-traded funds (ETFs) that align with these trends above.  “An example of this might be investing in senior housing developments based on the macro trend that many seniors are retiring and there being a lack of adequate senior homes to house seniors that need such facilities,” explains Roland Chow, financial advisor and partner at Optura Advisors.

Unlike traditional investment strategies that focus on sectors or industries, thematic investing emphasizes larger forces that influence the economy over time. Thomas J. Brock, CFA, CPA, an expert contributor at RetireGuide.com, notes, “The strongest thematic investment ideas are underpinned by strong macroeconomic, demographic, and/or technological trends that can be clearly quantified.”

Because these kinds of structural shifts take time to unfold, thematic investing is generally best suited for long-term investors. Brock cautions that themes “driven by cyclical hype or emotional sentiment” are unlikely to deliver sustained results.

Thematic vs. ESG Investing

Thematic and environmental, social, and governance (ESG) investing, while similar, are different concepts that investors often confuse. The former focuses on allocating funds to long-term trends or shifts in economic or technological conditions, such as clean energy, artificial intelligence (AI), or aging populations. These broad structural shifts, which may include causes that make positive change, are the basis for thematic investing.

ESG investing, on the other hand, evaluates companies based on how they operate rather than the trend they represent. Intending to support responsible corporate behavior, it considers factors like a firm’s carbon footprint, labor practices, and board diversity. ESG is more of a filtering framework for selecting investments based on values and sustainability metrics, rather than betting on a specific economic theme.

Common Thematic Investing Categories

Thematic investing applies to several core macroeconomic or technological movements. These can range from large-scale demographic shifts to innovations that reshape how we live and work. Additionally, they may be in the form of an individual stock or as noted earlier, a fund that owns shares of firms according to a particular theme.

Below is a breakdown of prominent themes investors focus on:

• Artificial intelligence. AI is a rapidly advancing technology, including via generative tools like OpenAI’s ChatGPT and Google’s Gemini, which may alter the way humans live and work for decades to come.
• Robotics. Automation and smarter machinery are changing the efficiency of industries like manufacturing and logistics.
• Health and wellness. Growing awareness of personal health lays the path for new products and innovation.
• Medicine and healthcare. Healthcare is a rapidly advancing area, featuring rollouts of new types of medicine, increased quality of care, and innovative products.
• Green or sustainable energy. The global movement for clean and sustainable energy is pushing investments in renewable sources like solar, wind, and electric vehicles.

Benefits and Risks of Thematic Investing

Thematic investing’s forward-thinking approach can be a beneficial way for long-term investors to realize gains. If you’re able to follow or predict a trend accurately, you can benefit from the growth that follows. With this in mind, however, there are risks you should consider before you buy shares of a stock or fund.

Predicting the future, even for seasoned investors, is easier said than done. And, even if you’re correct about what’s to come, it’s still possible to lose money. Robert R. Johnson, PhD, CFA, CAIA, Professor of Finance, Heider College of Business, Creighton University, cautions that “one not only has to identify the technology that is going to prove to be enduring, but one also has to identify the firms that will be the ultimate winners and losers.”

Unfortunately, falling into hype can be easy without proper research. To effectively invest in themes, it’s crucial to understand the sectors you’re investing in beforehand. Because of their speculative nature, thematic investments may also lack historical data, limiting your ability to predict how your securities will perform over several years.

Here are some benefits and risks to consider for thematic investments:

Where It Fits In a Portfolio

Where does thematic investing fit into a diversified portfolio? Because of their speculative nature, securities based on themes are typically long-term investments that fit in portfolios with a substantial time horizon.

“Thematic investments are most effectively implemented as satellite strategies that complement a traditional, diversified core investment portfolio,” Brock explains. “Satellite strategies can be used to express strong convictions and enhance growth potential, but they should not play an outsized role in an investment portfolio.”

In practice, this would likely mean allocating a small portion of your portfolio to thematic investments to shield you from risk while allowing for long-term speculation. Be aware, however, that whether you add these should depend on your goals, risk tolerance, and time horizon. A financial advisor can help you determine whether these types of securities fit your strategy and implement them in a way that suits your needs.

How to Get Started with Thematic Investing

You can invest in thematic securities through most brokerage firms. This may also include investment management firms, such as Vanguard, Fidelity, Charles Schwab, or Merrill Lynch. If you’re already working with a similar firm, such as in a discretionary arrangement (where advisors invest on your behalf), you can ask them about such assets and whether they match your goals.

Before investing, carefully assess and review a firm or fund and the theme it aligns with. As Brock mentions earlier, it’s important to distinguish legitimate economic and technological trends from those that are based on hype.

It’s also smart to consult with a financial advisor as you assess and consider thematic investing. Whether you work with a professional in a discretionary or non-discretionary arrangement, we recommend hiring a fiduciary. These experts must only recommend investments that are in your best interest. You can use a free matching tool, such as this one, to find a vetted expert that suits your needs.

Frequently Asked Questions

Is thematic investing risky?

Thematic investing can be a risky endeavor because you’re speculating on future economic trends and shifts. However, you must also select investments, not just ideas, that will win in the long term. This detail makes it much more difficult to be right.

What is the difference between thematic and sector investing?

Sector investing involves selecting securities in specific industries. Meanwhile, thematic investing emphasizes entire market areas based on economic trends and technological advancements. Because of this, one theme can intersect across various sectors.

For example, healthcare is a common theme; however, this can spread across several sectors, including technology, medicine, healthcare services, and more.

Is thematic investing good?

Thematic investing may be an effective long-term means to diversify your portfolio. By focusing on growth areas, such as artificial intelligence or advances in healthcare technology, you could realize legitimate gains if you select the right investments.

Spotting legitimate ideas, however, is the challenge. It takes time and effort to research themes based on real economic or technological shifts, not just hype. For this reason and the uncertainty of future asset performance, thematic investing can be risky and volatile. Speaking with a financial advisor can help you gain a better perspective and outside knowledge on whether a security is the right fit for your portfolio.