Traditional market wisdom suggests that investors should focus on major market sectors and diversify their portfolios across these sectors. But what should investors do when there’s a specific trend or new technology they want to focus their investments on?
That’s where a strategy known as thematic investing can be very useful. Thematic investing is a powerful way for investors to invest in a long-term opportunity that the market hasn’t yet fully recognized.
In this guide, we’ll explain what thematic investing is, how it works, and how you can get started investing in themes.
What is Thematic Investing?
Thematic investing is a strategy that involves investing based on long-term trends or specific ideas. Thematic investments might be based around a new technology, such as artificial intelligence, or around a new type of business, like e-commerce.
Importantly, thematic investments don’t necessarily line up with traditional market sectors. An investor who wants to invest around the theme of artificial intelligence, for example, might invest in a mix of tech companies, manufacturing companies that make hardware for robotics, and auto companies that are using artificial intelligence for self-driving vehicles.
Themes can be as narrow or as broad as investors want. Some other examples of popular investing themes include biotechnology, blockchain, health care innovation, and financial technology. In addition, themes don’t have to be limited to specific technologies or business models. Potential investing themes could focus on specific countries or regions, environmental sustainability, or global events like a war.
How Does Thematic Investing Differ from General Investing?
Thematic investing has a lot in common with investing more generally. Both involve researching investments, building a portfolio, and thinking critically about opportunities in the market.
What makes thematic investing unique is that themes often cut across market capitalization groups, market sectors, and countries – the usual boundaries that are used to define investing strategies.
A thematic investing strategy may incorporate companies from different market sectors that approach the same problem from different angles. It may also mix established companies that are just beginning to explore a new technology with startups that have built their entire business around that technology.
Another important difference is that while thematic investment strategies can be diversified across market sectors, they can also be quite narrow in scope. Depending on the theme, a thematic portfolio could be highly exposed to downturns in specific sub-industries.
How to Identify Themes Worth Investing In
One of the biggest challenges of thematic investing is figuring out what themes are worth investing in. A good theme should focus on a long-term opportunity in the market. It needs to be broad enough to include a diverse array of companies, but specific enough so that there’s a clear rationale behind which companies are included in the theme.
One of the best ways to identify themes worth investing in is to think about the technologies, companies, services, and topics that you care about. Are any of these unique and growing fields that may offer room for development in the future? Even if your initial answer is no, you may find an interesting theme by digging deeper into what technologies and business lines companies are working to bring to market.
Another way to find theme ideas is to consider a group of fast-growing companies from several different sectors. Is there a common theme that connects these companies and, if so, is it a topic that offers potential for long-term development?
You can also identify theme ideas by applying an investing lens to your news, conversations, and interests. If you hear about a new technology, consider whether it has potential to form the basis of a theme. If you have a conversation about a topic you hadn’t thought much about previously, follow up on the topic and think about whether it offers potential for investment.
Ways to Get Started with Thematic Investing
There are two main ways to start investing in themes: by investing in ETFs or by investing in individual stocks.
There are many ETFs built around popular themes, such as biotech, fintech, space exploration, blockchain technology, and more. For example, the Amplify Transformational Data Sharing ETF (BLOK) invests in companies related to cryptocurrencies and companies that are building their own blockchain-based applications. The iShares Global Clean Energy ETF (ICLN) invests in companies that are building renewable energy infrastructure or developing clean energy technology.
Investing in thematic ETFs is a simple way to get started with thematic investing. However, you don’t have much control over what’s inside the ETFs and you may not find ETFs for highly specific themes.
Building your own portfolio by investing in individual stocks is more work than investing in a thematic ETF, but it also gives you complete control over your thematic portfolio. You get to decide which companies are in or out and how big a slice each company should represent in your thematic portfolio.
Notably, you can lean on thematic ETFs when picking your own stocks. For example, if you want to invest around blockchain technology, you could include several of the top holdings of the BLOK ETF in addition to finding companies not included in that ETF.
You can also utilize a stock research or stock picking service to help you come up with ideas. For example, Motley Fool offers a few stock picking services tailored around specific themes such as real estate, augmented reality, and growth stock investing.
Benefits of Thematic Investing
There are a few benefits to thematic investing.
First, thematic investing allows you to invest in ideas. That’s powerful because it’s ideas that really move the market. For example, think about how the internet and the development of e-commerce as a business model have changed the landscape of the stock market over the past 30 years. Artificial intelligence, blockchain, or some other technology could be just as impactful over the next 30 years.
Another benefit of thematic investing is that you get to stick to what you know best. If you’re a biochemist, for example, you probably know more about biotech than the average investor and can do a better job of deciding which companies are most promising. That gives you a leg up on the market.
Importantly, thematic investing enables you to capitalize on trends. If you’re investing in the overall market, some parts of your portfolio may be growing fast while other parts don’t have much room for growth. With thematic investing, you’re riding the edge of a long-term opportunity that offers a lot of growth potential.
Thematic investing can also allow you to hedge your positions within a market sector. For example, if you’re bullish on artificial intelligence, you can invest in a dozen different companies working on AI instead of weighting your portfolio heavily towards just one or two companies.
Examples of Thematic Investing
There are many different investing themes and many different ETFs, stock picking services, and research tools built around thematic investing. Here are some examples:
ARK Invest is an investment firm run by Cathie Wood that’s focused specifically on building ETFs around innovative technologies. The ARKG ETF, for example, focuses on healthcare innovation that can result from genomic technologies. The PRNT ETF invests in companies that are leveraging 3D printing technology.
The Motley Fool Augmented Reality & Beyond
The Motley Fool has a stock picking service called Augmented Reality & Beyond. This service offers a portfolio of stocks built around the theme of, you guessed it, augmented reality. This service provides a great example of how to build a portfolio under a central theme. The portfolio includes stocks from AR technology companies as well as companies who are leading their industries in the use of augmented reality.
ESG investing stands for Environmental, Social, and Governance investing. It’s a broad investment theme that covers companies working on everything from clean energy technology to diversity in the workplace to global development. There are many different ETFs available focusing on different sub-themes within the broad umbrella of ESG investing.
Thematic investing offers a way for investors to build portfolios around specific ideas, technologies, and opportunities. You can invest in thematic ETFs or create a custom thematic portfolio by picking individual stocks related to a chosen theme. When choosing a theme, stick to what you know best and think critically about how a specific theme will create new markets and new business models.