Thematic investing is a strategy that involves putting capital into specific objectives or ideas – themes, if you will. These themes may be designed around long-term market trends, personal values and beliefs or social ideas. Many such trends – like ESG, cybersecurity and AI investing – are expected to play out over years or decades.

What is thematic investing?

Thematic investing aims to capitalize on long-term ideas, trends and personal and social values that don’t fit more traditional boxes.

For instance, sector investing focuses on specific sectors, like healthcare and manufacturing. Similarly, regional investing might put your capital to work in European or Asian markets.

But thematic investments aim to capture the upsides generated by economic, technological and social changes. In doing so, they often include assets from several other “boxes” at once, such as sector, style and market cap.

Consider artificial intelligence. Companies of different market caps and sectors develop or rely upon AI, including IT, automakers and clean energy producers. If you invested in AI as a theme, you might include small- and large-cap assets from each of these sectors.

Examples of investing themes

Thematic investments take many forms, depending on if you invest in a thematic fund or build your own. For instance, you might focus on assets related to:

• Technology, such as crypto, AI, robotics and fintech
• Environmentally-friendly industries like clean energy or water purification
• Socially-oriented businesses that invest in community products or women and minority leadership
• Changing social norms, such as growing marijuana acceptance
• Advanced cybersecurity needs
• The future of healthcare, nutrition and biotechnology
• Space travel, mining and communication

Many funds collect assets across these themes to focus on broader goals, such as megatrends (investments with global impacts).

Disruptors, or companies that could upend existing industries or create new ones, are also popular.

And let’s not forget about ESG-focused investments designed to build a cleaner, more sustainable future.

Pros and cons of thematic investing

Thematic investments make buying into specific ideas and personal preferences easy. But before buying in, it’s important to recognize that there are downsides, too.

Pros of thematic investing

• Align your investments with personal and financial objectives
• Buy into concentrated funds to augment your broader strategy
• Funds transcend individual sectors and market caps
• Invest in the future of technological and social innovation
• Thematic funds could outperform broader indexes and benchmarks

Cons of thematic investing

• There’s no guarantee that any individual asset or theme will succeed
• Thematic funds are still subject to financial swings
• Themes that do come to fruition can take years or even decades to pay off
• Many funds invest in smaller, less liquid investments, resulting in higher volatility and risk
• Some thematic funds charge higher fees (particularly actively-managed funds)
• Investing in multiple funds from a single theme risks concentrating your capital and increasing your risk

How can you take advantage of thematic investing?

Thematic investments offer a chance to capitalize on long-term social, economic and technological trends. These funds provide exposure to new regions, sectors, market caps and innovations.

Plus, concentrating parts of your portfolio into smaller ideas means you can profit from personalization and positive global impacts. Some thematic funds even target specific outcomes, such as conserving capital or meeting established growth targets.

To take advantage of thematic investing, you first have to decide which goals, innovations and ideas matter to you. From there, you’ll have to build your own fund or research existing funds with similar goals.

During this process, you’ll want to ensure that you remain properly diversified to minimize risk in your portfolio. Many thematic investors choose a mix of broad-based and narrowly concentrated funds to balance risk and reward.

Generally, broad funds provide more diversification for investors who want to capitalize on their moral compass while mitigating risk. Concentrated funds hold fewer securities, leading to less diversification and increased risk. However, concentrated funds can function as “building blocks” to construct or amend a robust, well-rounded portfolio.

And while many thematic funds are ill-suited as core investments, some broader funds provide enough diversification to serve as a solid foundation.

How to know if a thematic investment is a good idea

It’s possible for a single investment theme to spawn dozens of funds, with each fund manager taking a different approach. For example, a sustainable energy fund might focus on solar, wind or biofuel research and generation – or all three.

Due to such variations, it’s important to ask the following questions before investing in any theme or fund:

• Is the fund actively or passively managed? (Generally speaking, actively managed funds cost more compared to their passively managed counterparts)
• What is the criteria for selecting or excluding assets from the given fund? How often does the fund rebalance?
• How long will the underlying trend last? If the assets in a fund solve a problem, will the fund’s financial potential expire?
• How broad or narrow is the fund’s exposure? Does it have exposure across industries and market caps, or is it hyper-concentrated in a particular sector, region or innovation?
• What is your timeline for generating a return? What size of return do you need to make the investment worth it?
• Does the theme in general, and that fund in particular, fit into your portfolio and long-term goals?

Once you’ve outlined your own needs and begun answering these questions, you can determine if a thematic investment is right for you.

How to invest in thematic funds

With thematic investments, you can capitalize on your personal values or beliefs about the future. But you’re not limited to stocks – you can invest in bonds, commodities, real estate and more. You can incorporate these assets into your preferred theme by handpicking assets for your strategy.

If you don’t have the time or money to build a personalized portfolio, many investment platforms offer access to thematic funds. Aside from a range of options, managed funds offer instant diversification and the benefit of an expert researching potential investments.

For example, many – if not all – of Q.ai’s Investment Kits could qualify as thematic funds, like our:

• Clean Tech Kit, which focuses on building a cleaner, greener future
• Emerging Tech Kit, which invests in technological innovation
• Global Trends Kit, which provides up-to-date exposure on trends predicted to outperform in the future

Better yet, all of these Kits are backed by Q.ai’s artificial intelligence algorithms. Our AI scours the market to find the investments with the best risk-adjusted returns, based on its predictions. And once you’ve invested, it even works to rebalance and readjust your personal risk between Kits to minimize your risk of loss.

Thematic funds with an AI-backed twist? We’re here for that.

The bottom line on thematic investing

Thematic investment strategies help investors capitalize on personal preferences and future trends. By stepping outside traditional boxes, you can enjoy new levels of diversification and profit potential.

That said, it’s important to remember that many thematic trends are designed as long-term investment strategies. Additionally, thematic investing comes with its own risks that should be considered within your broader portfolio.

FAQs

What does “thematic investing” mean?

Thematic investing helps you capitalize on long-term ideas, trends and values that don’t fit into traditional boxes. Their goal is to capture the upsides generated by economic, technological and social changes across sectors and market caps.

Should I invest in thematic funds?

Whether you should buy into any given thematic fund depends on your preferences and financial situation. But generally speaking, thematic funds make adding specific ideas and innovations to your portfolio a breeze.

Is thematic investing risky?

Thematic investing, like all investment strategies, carries some risks, including liquidity concerns and potentially higher costs. Additionally, buying too many funds in the same theme risks concentrating your capital in just a handful of securities.