In recent years, a new investing style has surged in popularity: thematic investing. Instead of picking individual stocks based on traditional metrics, thematic investors align their money with macro-level trends.
These trends can range from sustainability to tech innovations and advancements. It’s when you see the bigger picture and make long-term investment strategies to earn from it.
But what exactly is thematic investing, and why is it resonating with investors of today? Let’s unpack everything.
What Is Thematic Investing?
Thematic investing involves placing your funds into companies and sectors that are tied to a specific global trend or idea. These areas are connected to economic growth and new-gen practices.
Some examples of such areas are:
- Clean energy, renewables, and sustainability
- Digital transformation and AI
- Aging population and healthcare
- Global urbanization and infrastructure
Instead of building a portfolio around individual earnings, you speculate on a certain theme that you believe will shape the future and invest accordingly.
The investment process is handled through a thematic investing platform where you can exchange these themes.
Why Thematic Investing is Trending
Investors have been showing increasing interest in thematic investing due to:
Alignment with Values and Beliefs
Many investors, especially younger generations, are more conscious about their choices. They want their investments to reflect their values.
Thematic investing allows them to focus on causes like climate action or human health, and showcase it through their portfolios.
Big Picture Focus
Thematic investors put their money on global megatrends, not company quarterly results. This forward-looking approach is great for the economy and the world that is changing rapidly.
Easy Access
Modern investing platforms like SoFi offer all kinds of investing, often bundled with themes and diverse asset classes. So, you can build fractional or model portfolios, making it easy to get started with minimal setbacks.
Diversified Exposure
These platforms also help spread risk across multiple companies and sectors tied to the theme. Unlike picking single stocks, you don’t have to worry about sudden spikes or crashes.
Pros and Cons of Thematic Investing
Thematic investing is great because it offers:
- Passion-driven strategy. You can connect your investments to what you care about.
- Trend focus. You can work with transformative global movements.
- Diversification with each theme.
- Potential for long-term growth.
On the other hand, the risks that come with it are:
- High volatility. Some themes can be significantly dependent on changing markets.
- Higher costs. Thematic ETFs can carry higher fees than index funds.
- Overconcentration. There’s a heavy sector overlap, especially in tech and green energy.
How to Choose a Theme
The first and most important step to beginning your thematic investment is choosing a theme to invest in.
To make a smart decision, don’t follow hype and focus on:
- Doing your own research. Understand the structural forces behind the theme.
- Watching the cost. Compare expense ratios and trading fees.
- Checking overlap. Analyze your total portfolio, and make sure you’re not hyperfocusing on a single theme.
- Set realistic timelines. Many themes take years to play out.
- Monitor and adjust. Reassess your theme’s potential and your exposure at least once a year.
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