- Thematic investing strategies consider long-term trends, ideas, beliefs, and values when choosing stocks, bonds, mutual funds, ETFs, and other investments.
- Among the most popular types of thematic strategies are those focused on disruption, megatrends, ESG (environmental, social, and governance), differentiated insights, and outcomes.
- Thematic mutual funds or ETFs may provide opportunities to invest in themes plus the benefits of professional investment research and management.
- Make sure to look under the hood to understand how a thematic fund works and how it could fit into your overall investment plan.
Want to invest according to your personal beliefs and values? Well, you may be in luck. Driven by investor demand, a new type of investment strategy, so-called thematic funds, are capturing the spotlight. Now you can find funds to help you invest based on where you believe the world is headed—or where you want it to go. There are funds based on disruptive trends like cloud computing and autonomous vehicles, as well as value-based strategies like those focused on women-run companies and environmental sustainability, and outcome-focused investments like those aimed at reducing portfolio volatility or protecting against inflation. The key is finding quality funds that align with your values and beliefs, which also fit into your investment plan.
Thematic investing: What’s different
Thematic investing strategies focus on finding potential opportunities created by economic, technological, and social developments that unfold over long periods of time. This approach differs from more traditional ways of selecting investments. Among them: a focus on stocks of a particular region (US stocks, for example), style (growth stocks), or economic sector (health care, technology). Instead, thematic strategies follow ideas and may cut across stock categories and even include other asset classes such as bonds or real assets like commodities or real estate.
Not all thematic funds are created equal, so investors should consider potential risks. Some funds may seek to capitalize on investor enthusiasm regarding short-term trends in markets, technology or society. We believe this approach poses significant risks and recommend instead that thematic investors look to strategies that rely on rigorous research and a long-term perspective.
While the number of investible themes is potentially as large as the number of ideas that an investor can conceive of, there are 5 broad types of thematic investing that we believe offer investors well-defined and potentially compelling options for personalizing their portfolios to reflect their ideas, beliefs, and values.
The world changes fast, and many of today's successful companies may be gone 10 years from now, replaced by firms that don’t yet exist. Disruption funds seek to understand long-term shifts in profits, as the market responds to technological advances, emerging industries, and changing consumer preferences.
Investors in disruption may benefit from the fact that financial markets tend to underestimate how quickly technology can cause rapid change in "business as usual." A disruption fund may focus on long-term trends that are still in the early stages of development such as cloud computing, autonomous vehicles, and mobile payments. Investing in a disruption theme may mean investing in companies that are directly driving long-term changes or potentially affected by those changes.
Many significant changes happen gradually. Some observers can see these changes coming but might not grasp how they will transform the world. Megatrend funds focus on understanding long-term profit growth driven by forces such as demographics or technology. By identifying these powerful, slow-moving trends, megatrend investors may benefit from anticipating their market-shaping effects such as shifts in consumer demand as populations grow older, or increased competition for natural resources due to population growth.
ESG stands for “environmental, social, and (corporate) governance,” 3 important factors that an investor or a fund manager might consider before investing in a company. ESG thematic investing may provide a way to invest in a strategy that reflects a disciplined evaluation of these considerations.
Today, the term ESG is often applied to many different goals and approaches, so investors should consider what their most important goals are and pick the ESG themes they want to focus on. To help them do that, we organize ESG themes into 3 groups shown in the table below. While all can align with investors' values, we believe "thematic" ESG funds are the ones many investors seek in order to express their values and to show concern regarding longer-term trends because these funds reflect long-term environmental, social, and governance themes.
Thematic ESG approaches may require research to determine which companies are truly dedicated to a subject. ESG environmental themes could include investing in companies that pollute less or produce alternative energy technologies. ESG social themes might include investing in companies that seek to provide safe working conditions or identify and target business opportunities in underserved areas. Governance themes could include composition of company boards and oversight, management incentives, capital allocation, and shareholder-friendly policies.
Each of these 3 categories of ESG investing has its own way of selecting investments.
|Negative screening||ESG integration||ESG thematic investing|
|Avoids investments in companies or industries deemed unacceptable or controversial, based on moral values and standards.||Incorporates ESG factors explicitly into investment decisions to help better identify risks and opportunities.||Focuses on long-term themes broadly tied to specific areas of sustainability.|
4. Differentiated insights
Differentiated insight thematic funds can give investors exposure to targeted ideas and investment selections that arise from unique insights that don't fit comfortably into other categories. These themes may reflect a unique investment view or belief about what makes a company an attractive investment, based on research and may give investors a long-term advantage. For example, some differentiated insight funds pursue companies led by their founders, based on the belief that the passionate involvement of a founder gives those companies an advantage.
Outcome-oriented thematic funds are designed to fulfill a specific objective within a portfolio, which may help an investor weather long-term market changes and trends. For example, an investor wants to invest in US stocks, but is worried about inflation over time. An outcome-oriented thematic fund could provide exposure to market sectors and companies that have historically performed well during times of high or rising inflation. Another example of an outcome-oriented fund might be one designed to provide more consistent returns by investing in stocks that have historically been less volatile.
How to invest in themes
Investors who want to put their money where their beliefs are should consider carefully whether the strategy of a thematic fund aligns with those beliefs and how it fits with their overall investment plan. For example, is a broad or concentrated fund preferable? A broad fund with a diverse range of holdings may be able to play a larger role, because its balance between return and risk may closely resemble that of the overall stock market. Many ESG funds are designed to resemble a broad market index, while favoring companies that align to specific values. On the other hand, a more narrowly defined thematic fund that holds fewer stocks or bonds may be more appropriate to use as a focused building block within a portfolio. For example, a cloud computing-focused disruption fund may only represent a small portion of an allocation to stocks within a portfolio.
Investing in ideas requires research to find the companies that best represent a theme. Thematic investing mutual funds or ETFs have professional research teams and portfolio managers who do that work. Thematic funds also allow investors to diversify their investment in a theme. An individual investor may add a small number of stocks related to a theme to their portfolio, but investing in too few stocks can add additional risk. Not all companies will benefit equally from their connection to a theme. Investing in a fund with many stocks connected to that theme can spread the risk.
Learn more about thematic investing strategies.
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