Thematic Investing: Definition, ETF & Fund Types
Thematic investing is a long-term investment philosophy that focuses on opportunities found in transformational trends. Isolating these trends moves the focus from specific companies or sectors into broader innovation that can transform many industries.
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What Is Thematic Investing?
Thematic investing is a strategy where investors seek to capitalize on economic trends. Examples of thematic investing trends would be blockchain, cybersecurity, and clean energy trends. Advances in these areas have an impact on a number of companies and sectors over time.
How Thematic Investing Works
Similar to other long-term investment strategies, thematic investing seeks to capitalize on successful innovations. Specifically, thematic investing emphasizes megatrends that would be driven by technological breakthroughs. For example, BlackRock has a Sustainable Energy fund that invests in securities of companies that are engaged in alternative energy and energy technologies.
As the companies in the fund succeed with new innovations, stock prices rise. It is a long-term approach that seeks to increase fund value based on the success of megatrend technologies.
Tip: Thematic funds do fluctuate in value and have investment risk. Investors should review the prospectus carefully before investing.
Sector Investing vs. Thematic Investing
Thematic investing is often confused with sector investing, but there are some key differences. Sector investing puts investment funds into specific segments of the economy. Popular segments include energy, healthcare, and information technology. Thematic investing is different; it uses broader technological advances to improve output spanning across multiple sectors. Popular themes include clean energy and robotics.
Sector Investing | Thematic Investing |
Specific segments of the economy | Span segments of the economy |
Funds tend to be larger to encapsulate the industry | Funds have a narrow focus with fewer companies |
Driven by industry trends | Driven by ideas, beliefs, values, and disruption |
Tip: Stay abreast of emerging trends to identify new themes to invest in. Use social media and news resources to see what people are talking about and why it might be important.
Thematic ETFs & Index Fund Examples
There are numerous ETFs and index funds out there for investors to choose from. Here are some common themes.
Environmental
Investing in the climate and environmental advances lets people invest in companies that will help reduce the effects of global warming and our own environmental impact. Environmental or green funds invest in companies working on solutions in areas like energy and manufacturing to reduce our carbon footprint and promote green initiatives.
Examples of environmental-themed funds are:
BlackRock Sustainable Advantage (BIRAX)
Parnassus Core Equity Investor (PRBLX)
Shelton Green Alpha Fund (NEXTX)
Blockchain Technology
Blockchain themes seek to provide new innovations regarding cryptocurrency, NFTs, and blockchain technology. The technology can be utilized in areas such as the banking, medical, and insurance sectors to provide better and more secure solutions to consumers.
Examples of blockchain-themed funds are:
Bitwise Crypto Industry Innovators ETF (BITQ)
Siren Nasdaq NexGen Economy ETF (BLCN)
VanEck Digital Transformation ETF (DAPP)
Healthcare
Healthcare thematic funds seek to capitalize on the innovations in developed and emerging market companies that focus on healthcare solutions. Healthcare solutions may include technology for vaccines or breakthroughs on cancer treatments.
Examples of healthcare-themed funds are:
iShares Healthcare Innovation UCITS (HEAL)
Global X Health & Wellness Thematic (BFIT)
Goldman Sachs Human Evolution (GDNA)
Benefits & Characteristics of Thematic Investing
There are several benefits of thematic investing that include:
Sector Independence: Because themes transgress various sectors, they aren’t limited to the traditional ups and downs that sectors see with investments.
Reflects the Changing World: Lets investors be part of the cutting-edge technology that will transform the world.
Potential for Higher Returns: Funds are smaller with a keen focus on the theme that, if the area performs well, can result in higher returns compared to similar mutual funds.
Disadvantages of a Thematic Portfolio
There are some disadvantages to thematic investing that include:
Chasing Fads: Because thematic investing follows the latest trends, it runs the risk of trying to follow the latest fads and can push investors into a fad or sector of the economy that's overheated.
Marketing Ploy: Critics of thematic investing say that this is a way that investment firms attract fast money.
Requires Patience: This is a long-term strategy that must wait out the ups and downs of technological innovations.
How To Invest In Thematic ETFs or Funds
Investors seeking to invest in a thematic portfolio need to do their due diligence on the funds to make sure that it aligns with their desired investment objectives. Once the investor is satisfied with the investment option, they can purchase the fund through a brokerage account.
Bottom Line
Thematic investing is a way for investors to capitalize on the biggest trends that can transform the way people operate across industries. This long-term strategy involves risk, but many investors like being part of societal solutions that will make the world a better place. That, along with high possible returns, is the attraction for many.
This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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