What is thematic investing? Thematic investing is an approach wherein investors invest in long-term trends rather than specific companies or sectors. Thematic investing is based on an understanding of the impact of long-term social, economic, technological, and political trends and investment opportunities that may arise out of them. The idea is to outperform traditional indices that represent the markets as a whole and identify specific areas of high growth. Here are four things you need to know about thematic investing.
Thematic investing is not the same as sector investing
Both thematic investing and sector investing work in a similar way. However, they are not exactly the same. Sector investing is investing in certain sectors of the economy such as pharma, banking, information technology, and so on. Thematic investing, on the other hand, focuses on a core theme, which may be spread across multiple sectors. Let us take the example of the disruptive technologies theme. This theme can span multiple industries such as artificial intelligence, blockchain, IoT, 3D printing, virtual and augmented reality and so on.
Thematic investing is a long-term strategy
Thematic investing is a long-term investment strategy. It does not seek to profit from short-term price variation. Rather, it focuses on broad long-term trends with long-term growth potential. For example, if you are investing in the electric vehicle (EV) theme, you would be betting on the potential of electric vehicles with a long-term horizon of a decade or more.
Investors need to be aware of the risks
Now that you know what is thematic investing, it is important to keep in mind that thematic investing is a high-risk, high-return proposition. Focusing only a single narrow theme may increase the risk for an investor. Further, every great theme may not translate into good stock market returns. Lastly, if someone is investing in a theme that has already run its course, the future growth potential may not be very high. Investments based on innovation trends can be very risky and investors can expect short-term volatility.Â
ETFs provide a convenient option of investing thematically
For an individual investor, identifying a theme and then selecting stocks may be a cumbersome process. This is where thematic ETFs come in. Thematic ETFs refer to funds that offer investors the opportunity to invest in a particular theme. The ETFs would hold stocks of companies that are likely to benefit from the theme.
For example, the Global X Robotics & Artificial Intelligence ETF (BOTZ) provides an opportunity to invest in companies in developed markets that are involved in the development of robotics and/or artificial intelligence. Or let us say that you are interested in the potential of medical science extending and improving human life through advanced biotechnology solutions such as gene editing, stem cells, and so on. Then you can look atthe ARK Genomic Revolution ETF (ARKG). As mentioned earlier, as an individual investor, you may not have the required knowledge and expertise to select stocks related to such themes. Investing through an ETF takes care of that.
Another way of thematic investing is through Vests or curated portfolios on the Vested platform.
Vests consist of stocks and/or ETFs. You can choose theme-based Vests to invest in themes such as digital cash (if you believe that digital payments are the way of the future) or the SAAS Vest if you believe that software as a service will generate higher returns. If you’d like to know more about how you can invest in Vests on Vested, check out this video.
Since thematic investing comes with higher risk, you should consider your risk appetite and asset allocation before investing.