Thematic Investing 101

Thematic investing is becoming increasingly popular, especially among younger Americans. Let’s explore this approach and learn more about investment themes.

Man putting coin into blue piggy bank

Thematic investing is seeing greater investor interest and more widespread adoption across the financial industry. This trend is being driven by young investors, in particular, and we continue to see its impact on the investment landscape. According to a study by Global X, 83% of millennials reporting being “extremely interested” or “very interested” in thematic investing. Over $83 billion is invested in funds that focus on an investment theme, too. Thematic investing may help keep people engaged in the process because themes are typically far more interesting than generic portfolios. Given the popularity of thematic investing, we think it’s worth digging into this topic more deeply.

What Investment Themes Are

If you invest in a theme, you’re selecting the stocks of companies that you hope will profit from a major technological, economic, or environmental trend. The trends powering thematic investing are expected to be disruptive and long-lasting, making them appropriate for potentially sustained use. Examples of investment themes include clean energy, artificial intelligence, and social media. Importantly, investment themes cut across traditional industry sectors. The clean energy theme might combine electricity providers using renewable energy resources (from the Utilities sector) and companies that produce solar panels or wind turbines (from the Industrials sector). This blending of typical business sectors is what sets thematic investing apart from more traditional approaches to selecting stocks.

What Investment Themes Aren’t

Investment themes aren’t sure strategies to beat the market or earn money. Thematic concepts can fizzle out after a brief run or never take off at all. History is littered with claims of “the next big thing” that turned out to be wrong.

While a thematic investment approach typically crosses traditional sector boundaries, some thematic investing isn’t equivalent to a diversified portfolio. Totally thematic portfolios may be riskier and more volatile than diversified portfolios.

How You Can Combine a Theme with Diversification

Choosing a theme and building a diversified portfolio aren’t mutually exclusive approaches to investing. You can have both. A well-diversified portfolio can serve as the foundation of an investment account with a small amount of additional money dedicated to an investment theme. Thematic investing shouldn’t be viewed as a replacement for diversification, but it can be used as a “complement” to a diversified portfolio.

Wrapping Up

Themes enable investors to help fund, and potentially profit from, key trends. Thematic investments target ideas, personal values, or economic shifts for investors who want to invest in an idea that doesn’t have its own official sector. The variety of investable themes is constantly evolving, too. You can invest in a chosen theme through individual stock research, by using a thematic exchange-traded fund (ETF), or by selecting a pre-built portfolio. These flexible elements, and growing popularity, make thematic investing an interesting part of the financial landscape! Because investments have risk of losing value and are not FDIC-insured, you should consider consulting a financial advisor before investing.

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