What You Need to Know About Thematic Investing

When you hear things like “EVs are the future” or “AI will grow and grow,” you might think to yourself, “ How can I, as a seasoned investor, get a piece of this pie?” You can’t invest specifically in ChatGPT just yet, but how are you going to invest in AI as a trend?

Thematic investing is an investment strategy aimed at identifying and exploiting downward long-term trends that are expected to drive growth and disrupt traditional industries. As the name suggests, thematic investments revolve around a topic – usually an emerging long-term trend (for example , investing in ChatGPT and everything related to artificial intelligence). But instead of investing in individual companies or sectors, thematic investing revolves around macro “themes” that shape the future.

While all of this may sound attractive, there are significant risks to consider before attempting this investment strategy on your own.

How does thematic investing work?

Thematic investing is centered around specific themes, often driven by technological advances or other “disruptive” macroeconomic factors. Think about topics like renewable energy, artificial intelligence, cybersecurity, or blockchain.

This approach to investing attempts to predict how major social shifts will play out and affect the financial system and economy from top to bottom. The strategy is based on the expectation that investing in a particular topic is a bigger swing that will bring more profit.

Thematic and sectoral investment

You may have noticed that topic investing is very similar to industry investing, but they are actually two different strategies. Sector investing usually means betting on a particular group of stocks (such as healthcare or energy). Thematic investing, on the other hand, takes a much broader approach, often involving multiple sectors related to a particular theme.

Attractiveness of thematic investment

Thematic investing is best for aggressive investors with a long-term perspective. Successful thematic investing requires in-depth research and expertise in understanding the underlying drivers and potential impact of each theme.

For those who like to “play the game” so to speak, another attraction of thematic investing may be to take the opposite view. While popular themes can be overhyped and lead companies to overvalue, identifying undervalued themes can offer unique profitable investment opportunities.

Thematic investing is not for those who are trying to get rich quick. The themes chosen tend to play out over years or even decades. That’s why investors who take this approach are looking to capitalize on the combined growth potential of companies that align with these long-term trends.

Thematic investment risks

The higher the growth opportunities, the higher the risks. Forgive me for pointing out the obvious: you cannot predict the future. Themes may not perform as expected, and even if they do, not all companies within a theme will perform well. Even if an investor detects a significant shift in society, this theme may not be reflected in stock market returns.

Betting on how a particular trend will develop always involves inherent risk. Plus, as I explained above, this strategy requires a long-term perspective. Investors should be prepared for possible short-term fluctuations in the value of their thematic investments.

Conclusion: don’t fall for the trend

“Thematic investing” is a buzzword these days, but it doesn’t necessarily apply to the casual, everyday investor. Investors should be aware of the high risk pitfalls of participating in niche themed ETFs; but at the same time, if done carefully, thematic investments can bring big returns.

If you’re new to investing, it’s much less risky to start with mutual funds and ETFs professionally managed by a provider like Vanguard. Here’s our guide to building an easy “set it and forget it” investment portfolio.

Remember that although thematic investments can be attractive, they should be part of a well-diversified investment portfolio. As always, you should consult a financial advisor or conduct thorough research before making any investment decisions.