“ Thematic investing is designed to help you execute an investment strategy that aligns with your thoughts and beliefs. ”
Today, there are more choices than ever to customize your life to your individual preferences and values. You can have your car “wrapped,” choosing virtually any color or graphic design you desire. You can adjust your social media settings to avoid seeing posts from people you’d rather not follow. You can create a “memoji” to match your personality, individual style and mood. And you can choose brands that align with the causes you care about — or boycott the brands that clash with your values.
We’ve gotten used to being able to spend our money on services and products that let us express our points of view and live our values. But what about when it comes to how we invest our money? Sure, there are ways to refine your investment choices, including sectors, countries, factors, strategies and ESG (environmental, social, governance). But options for personalization are increasing in new, meaningful ways, and one example is the rise of thematic investing.
If you haven’t heard of it yet — or you’ve heard the term but don’t really know what it is — here is a quick primer on thematic investing and what to consider before incorporating it into your portfolio.
What is thematic investing?
The goal of thematic investing is to invest in a global trend, idea or set of values — categories that are often too broad to address by investing in a single stock, sector or index. Say, for example, you believe in the promise of 3D printing to revolutionize manufacturing and potentially have major impacts on the global economy. 3D printing is currently in its infancy and applications are being developed or are in use across different industries. This idea of investing in a promising area that can span multiple sectors is an example of thematic investing.
Another example would be investing in companies that align with a cause or value you wish to support with your investments. You may also believe that companies that uphold these values will perform better in the long term. It could be companies that prioritize diversity and inclusion or those that are creating or leveraging renewable energy.
Some people are drawn to thematic investing because they want to invest in long-term trends they think are promising. Others are drawn to it for more altruistic reasons — the idea of investing in areas that you personally feel can improve society over the longer term can be compelling. Whatever your unique values or preferences may be, thematic investing is designed to help you execute an investment strategy that aligns with your thoughts and beliefs.
How can individuals access thematic investing?
Thematic investing has come a long way over the past decade, but it is still early days. Today, individual investors have two primary ways to invest in themes: through ETFs and mutual funds or by investing in a group of stocks directly.
Thematic mutual funds and ETFs have exploded over the last few years with a wide variety of strategies and goals. In 2021, in a strong market, close to 600 thematic funds debuted globally, according to investment researcher Morningstar. Notably, 2022 was a challenging year for all asset classes and the launches of new products — including thematic funds — declined. As with any type of investment vehicle or strategy, investors should do their research before jumping into a thematic fund. Scrutinize the fees, the level of diversification, whether the fund is actively or passively managed, how the stocks in the fund are weighted and how exactly it provides exposure to the theme.
When it comes to investing directly in stocks that align to a theme, the landscape of resources and investment platforms is fragmented but growing. One of the most challenging aspects of DIY thematic investing is the deep research that is required to identify a list of relevant stocks. Most people do not have the time or access to the right information to properly research a large universe of stocks related to a given theme.
No matter what approach you choose to take to thematic investing, consider whether the idea or trend behind the theme is one that truly has long-term growth potential or is more of a buzzy fad that could fade quickly. If you are committed to the long-term prospects of a trend, be prepared to stick with it over a longer time horizon.
Is thematic investing for you?
Thematic investing can be attractive to an investor who has convictions about a trend or idea and wants exposure to it in a more targeted, concentrated way. Consider that many themes are growth-oriented, meaning they may have strong opportunity for upside, but also may present heightened potential for downside — hence the importance of not putting all your eggs in one basket. While thematic investments should not be a core holding of a portfolio, they could complement a diversified portfolio.
Thematic investing has the potential to allow many people to pursue ideas and trends they believe in. It could draw many more people into the world of investing by giving them more of a personal stake in their investments. If thematic investing interests you, take your time getting started. Consider the investing options and watch for new developments. Most importantly, consider your risk tolerance, time horizon and your broader goals before diving in.
Isaac McGuffin is director of thematic investing at Charles Schwab.
Also read: Climate change meets political change: Key 2024 election issues for ESG investors
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