What is thematic investing and how does it work?

Investing as we know it has come a long way from the days of buying shares at Jonathan’s coffee house, the site of the first regular dealings in stocks and commodities in London. Advancement in technology and digitalisation have brought a whole world of new opportunities and strategies across the investment universe.

One of the latest innovations that has grown in popularity in the last couple of years is thematic investing. Find out how it works, with common examples and types of thematic funds to consider.

Thematic investing definition

Thematic investing is a type of investment strategy that aims to capitalise on growing trends of the future. This could be technology advancements such as artificial intelligence and robotics, or things related to climate change that will power the future, like energy generation.

Essentially, anything that could make a structural change to life as we know it today.

This approach to investing, by identifying the trends and themes of the future, can reward investors with healthy returns over the long term. However, nobody knows what the future might hold or how it might play out. So it’s a risky approach for investors, and it could lead to negative returns if the market sentiment and anticipation fades.

How thematic investing works

The simplest and easiest way to start investing “thematically” is to invest in Exchange Traded Funds (ETFs). An ETF is a type of collective investment where investors’ money is pooled together and then invested by a professional fund manager into a selection of stocks that meets each fund’s objective.

There are different horses for courses when investing in thematic ETFs. Some will invest more generally, others will specialise in a particular area, like cloud computing or demographics. So, you’ll need to do your research to find a suitable investment for the mega trend or theme you think is the future.

Alternatively, you could create a portfolio manually by investing in shares of companies that give you exposure to a particular area. For example, companies which specialise in artificial intelligence or automated cars.

Investing in individual shares is a higher risk approach to investing when compared to funds, where your money is spread across a variety of different investments to help spread your risk: this is called diversification.

The rise in thematic investing

The term thematic investing is in vogue now, but it originally gained popularity in 1970s and 1980s as investors began to see the potential of long-term societal trends and how they drive economic growth, and increased profitability for businesses and shareholders.

More recently, the growth of thematic investing has gained momentum once again. Investors have become growingly interested in specialist investment themes in areas such as ESG (environmental, social and governance), energy, and technology. The Covid-19 pandemic highlighted how quickly structural changes to society can occur.

The total assets under management in the ETF sector across the US and Europe was approximately $10tn (£8tn) towards the end of 2023. Within this, thematic ETFs form a niche, but rapidly growing segment. Thematic ETFs specialising in sustainability were the fastest growing over the past 10 years, including health, sustainable cities, and clean tech.

Does thematic investing work?

The jury is still out on thematic investing as an investment strategy, especially when compared to more traditional investment approaches that have stood the test of time. Mega trends and themes that have a quick rise to fame can fall out of fashion just as fast, which runs the risk of investors buying high and selling low. Ultimately, it’s your call to make. What is a trend for the future? And what is a fad?

We think investing across a diverse range of asset types (such as shares, bonds, and alternatives), geographies, industries and trends offers the best chance of investing success over the long term.

Thematic investing as a ‘satellite’ portfolio

Whilst we always recommend a diversified portfolio of investments as the backbone of any investment strategy, there is an approach that combines the best of both opportunities.

It’s called “core-satellite investing” and means dividing your money across two pools. The larger pot is for your long-term consistent returns that aims to target your overall investment objectives. The smaller pot is for niche or specialist investments that could boost your total returns if successful but aren’t essential for your long-term financial planning.

How to invest in thematic funds

You can invest in thematic ETFs through Charles Stanley Direct. Our online investment service provides you access to over 12,500 UK & international shares, funds, ETFs and investment trusts. You can trade online, over the phone or via the app. You can also use the search function to find the particular thematic investment you are looking for.

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Please note: This article was released prior to SDR and thus the information may not be in line with the Anti-Greenwashing rule but contextually is appropriate for the time it was written.