The world of investing is constantly evolving, and new approaches are always emerging in an attempt to outperform the broader market and achieve superior returns.
Perhaps one of the fastest-growing approaches today is thematic investing, which has gained popularity among investors seeking to align their portfolios with their specific values and beliefs.
Rather than focusing solely on financial metrics or traditional market segments, thematic investing seeks to capture the potential of emerging trends and shifts in technology, demographics, and global issues.
In this article, we will jump into the world of thematic investing and explore its benefits, risks, and strategies, providing you with the tools and knowledge to make informed decisions when investing in themes that matter to you.
We’ll also cover some themes currently dominating the financial market and some effective ways to invest in these trends for the long term.
How Does Thematic Investing Work?
Utilizing a thematic investment strategy isn’t all that different from other investing forms. Like those who participate in more traditional investment strategies like investing in specific sectors, geographic locations, or asset classes, thematic investing focuses on specific themes (or trends) that an investor believes will outperform the broader market.
Thematic strategies aren’t new. However, the proliferation of new technologies and the incredible innovation that has taken place in the past decade has led to a resurgence of investors becoming more interested in investing in a particular theme.
But exactly how does thematic investing work?
Well, how thematic investing works in practice is by an investor first choosing a specific theme to focus on. For example, it could be artificial intelligence or renewable energy (don’t worry, we’ll touch more on some specific opportunities to invest in these themes shortly). Then, an investor will focus on performing proper due diligence and research to find specific companies, funds, and alternative asset classes that will expose them to their identified trend.
Using our example of artificial intelligence, an investor could invest in AI in many different ways. More specifically, an investor could invest in the semiconductors that are powering the AI theme, the raw materials needed to build semiconductors, specific companies leveraging AI into their business operations, and even research firms who aren’t selling a product but rather working towards building the next generation of AI models.
The point of thematic investing is to build a well-constructed thematic portfolio that will cover a specific theme in its entirety. This means there are multiple different thematic investing strategies available to investors, and each individual must find the style and portfolio balance that works best for them.
Trending Examples of Thematic Investing
We’ve briefly mentioned two thematic investing examples already (AI & renewable energy), however, multiple other themes are catching the eye of savvy investors.
Some of the most popular and dominant themes today include:
Artificial Intelligence (AI): By now, you’ve probably heard of artificial intelligence. However, for those who haven’t, AI is the development of computer systems that can perform tasks that normally require human intelligence, such as visual perception, speech recognition, and decision-making. It is currently being used in a wide range of industries, including healthcare, finance, transportation, and education. And with such promise and an exponential rate of adoption in today’s world, the potential future applications of AI make this one of the most promising thematic investing trends in the world today.
Renewable Energy: Renewable energy refers to the energy that comes from natural resources that are replenished over time, such as solar, wind, and geothermal power. As the world moves towards cleaner and more sustainable energy sources, investing in companies that are developing renewable energy technologies has become a very popular thematic trend. This includes companies that manufacture solar panels, wind turbines, and energy storage systems, as well as those that provide energy management and efficiency solutions.
E-commerce: E-commerce refers to the buying and selling of goods and services over the Internet. The digital economy is slowly picking up steam, and e-commerce companies such as fintech providers and digital storefronts will continue to grow as consumers prioritize the convenience and cost savings e-commerce provides. Other trends, such as virtual reality and spatial computing, are making the digital economy even more lifelike, which should be an additional tailwind for this industry in the coming decades.
Cybersecurity: As cyber threats become more sophisticated, investing in companies that provide cybersecurity solutions is perhaps one of the most important themes in the world today. This includes companies offering software, hardware, and consulting services to protect and stop malicious cyber-attacks.
Healthcare Innovation: Investing in healthcare innovation has become an attractive theme due to the aging of the population and the increasing prevalence of chronic diseases. Healthcare innovation is a wide umbrella, though it usually focuses on companies that are developing new drugs, medical devices, and new technologies focused on improving patient outcomes.
Thematic Funds & Stocks to Invest In
Now that we have a better idea of which themes many investors are currently focusing on let’s go one step further and identify some actionable investment opportunities for investors to consider – we’ll cover a wide range of investments, including individual stocks, mutual funds, and some crypto as well:
Artificial INTELLIGENCE Investment Options
- The Global X Robotics & Artificial Intelligence ETF (BOTZ) is an investment fund established in 2016 that seeks to invest in companies that stand to benefit from the increased adoption of robotics and artificial intelligence. BOTZ holds 44 stocks with a focus on enterprises working in industrial robotics, automation, non-industrial robots, and autonomous vehicles. Its top five holdings, which account for approximately 40% of the fund’s assets, are Keyence, Fanuc, Intuitive Surgical, ABB, and NVIDIA.
- Cryptocurrency Fetch.AI (FET) is a blockchain-based platform that leverages artificial intelligence to enable autonomous machine-to-machine communication and value exchange. The platform uses smart ledger technology to create autonomous agents that can interact with each other and complete tasks without human intervention. Fetch.AI’s technology also optimizes network performance by dynamically allocating resources based on demand.
Renewable Energy Investment Options
- NextEra Energy (NEE) is a leading wind and solar energy producer, generating power through its Florida utilities and energy resources segment. The company has committed to achieving zero carbon emissions by 2045 through its Real Zero plan, which involves expanding solar energy and storage capacity and replacing natural gas with green hydrogen and renewable natural gas. NextEra’s strong performance over the past 15 years, with a total return of nearly 1,000%, has been driven by its above-average growth rate and consistent dividend increases. The company expects continued investments in renewable energy to drive earnings growth and maintain its strong balance sheet, with predicted annual earnings and dividend growth rates of 6-8% and 10%, respectively, through at least 2024 and 2025.
- The iShares Global Clean Energy ETF (ICLN) invests in global companies that produce renewable energy, such as solar and wind power. The fund has almost 100 holdings, with the top five holdings including Enphase Energy, First Solar, Vestas Wind Systems, Consolidated Edison, and SolarEdge Technologies. The ETF concentrates its investments at the top, with the 10 largest holdings accounting for over 50% of the fund. As well, ICLN rates highly on environmental, social, and governance (ESG) factors and has a relatively low expense ratio of 0.40%, making it an excellent choice for socially responsible investors who want to capitalize on the renewable energy and climate change theme.
E-commerce Investment Options
- MercadoLibre (MELI) is the leading e-commerce company in Latin America, operating in 18 countries with about half of its revenue coming from Brazil. Its primary businesses include an e-commerce marketplace, shipping services, and a suite of financial services under Mercado Pago, which includes mobile point-of-sale devices, digital wallets, and loans. The company is growing rapidly, with profitability increasing and consistent topline revenue beats. Mercado Pago has a total payment volume of well over $75 billion, and the company is expected to continue its high growth trajectory due to the underpenetrated e-commerce market in Latin America and expanding middle class.
- Etsy (ETSY), a popular e-commerce marketplace for handmade and vintage products, has been highly profitable due to scalability and network effects of their business model. The company has little competition in the artisan e-commerce space and has expanded its business through acquisitions, including Reverb, Depop, and Elo7, to help build out their offerings of niche products to online shoppers.
Cybersecurity Investment Options
- The First Trust NASDAQ CEA Cybersecurity ETF (CIBR)is one of the largest cybersecurity ETFs on the market with $4.8 billion in assets under management. It currently invests in 37 stocks in the cybersecurity industry and has an annual expense ratio of 0.60%, making it a very affordable option for investors. The fund offers the opportunity to gain exposure to a diversified portfolio of cybersecurity stocks with a single investment, which can be great for those looking to invest in cybersecurity but aren’t completely sure where to start.
- CrowdStrike Holdings (CRWD) provides cloud-based endpoint security, which is particularly well-suited for companies who operate in the cloud. Its software uses machine learning to detect security breaches and the company has grown its product offerings to over 17 different modules in the last 5 years. CrowdStrike is poised to continue growing rapidly in an increasingly mobile world with more devices coming online and the constantly evolving threat cyber-attacks poise.
Healthcare Innovation Investment Opportunities
- Novocure (NVCR) offers an innovative cancer treatment called Tumor Treating Fields (TTFields) that disrupts cancer cell division using electrical fields. TTFields is currently an approved treatment for glioblastoma and mesothelioma and the company is currently conducting clinical trials for non-small cell lung cancer, ovarian cancer, brain metastases, and pancreatic cancer. Successfully treating these new diseases would have the potential to expand Novocure’s market opportunity by 14 times its current size.
- Intuitive Surgical (ISRG) is a prime illustration of a thematic stock that encompasses multiple different themes including AI and healthcare innovation. The firm’s Da Vinci robotic surgical system has been utilized in over 10 million procedures since its launch in 1999. The pandemic had a negative impact on the company’s operations as several elective surgeries were delayed, leading to a difficult supply chain environment for Intuitive and its clients. Nevertheless, in the long term, the company is expected to have significant growth potential as the aging population will require the types of surgical procedures where Da Vinci is frequently employed.
Does Thematic Investing Actually Lead to More Money?
There’s no question that thematic investing has gained in popularity in recent years, but does it actually lead to more money?
While there is no guarantee of success in any type of investing, evidence suggests that thematic investing can be a profitable strategy.
More specifically, thematic investing has the potential to vastly outperform broader market indices or more traditional sector investing, particularly during periods of technological innovation. For example, thematic funds focused on sectors such as healthcare, technology, and clean energy have been particularly successful in recent years, as these industries have experienced rapid growth through constantly improving technology and record levels of government support programs.
However, it’s important to note that thematic investing does carry significant risk.
Focusing on a single theme or sector can leave investors vulnerable to industry-specific risks and volatility. Additionally, thematic funds may be more expensive than traditional index funds, which can eat into returns over time.
Ultimately, the success of thematic investing depends on the specific theme being pursued, the skill of the investor, and market conditions. And as with any investment strategy, investors should carefully consider their goals, risk tolerance, and investment time horizon before investing in thematic funds.
Key Takeaway
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Thematic investing is a strategy that allows investors to focus on specific themes or trends expected to drive future growth and innovation.
The approach offers a unique opportunity to gain exposure to companies that are likely to benefit from changing market dynamics, demographic shifts, and technological advancements.
Investors can use thematic funds to access a broad range of companies that share similar characteristics and are aligned with a particular theme or trend their interested in.
However, like all investment strategies, there are risks associated with thematic investing, including concentration risk and lack of diversification. Investors should carefully evaluate the investment thesis and consider their risk tolerance before investing.
Additionally, it’s important to note that thematic funds may experience higher volatility than traditional broad-based funds due to their narrow focus.
Overall, thematic investing can be a powerful tool for investors seeking exposure to long-term trends and disruptive technologies shaping the future.
Fortunately, with this approach’s growing popularity, access to a thematic fund or other investment options has never been more accessible, making it easier to access the benefits of thematic investing in a cost-effective and diversified manner.