The Rise of Thematic Investing

As an investor, you’ve probably heard of investing by growth, value, and sector. But these popular methods of investing are not the only way to decide how to put your dollars to work. Over the last twenty years, a new type of investment strategy has come up, ostensibly beginning with the “dot-com” craze: thematic investing.


  • Thematic investing is a strategy that offers focused exposure around objectives, ideas, values and beliefs, and social innovation and advancement. “Themes,” if you will.
  • Thematic strategies are similar to other approaches in that you select asset classes that fit a particular “box,” but because themes tend to cut across sectors and market caps, it can provide another method of diversification.
  • Some of the most common thematic investment strategies include sustainable investing, emerging market assets, “megatrends” such as agriculture and clean water initiatives, and disruptive investments in companies that buck the status quo.
  • While thematic investment can provide some diversification, funds that are too narrow carry risks of high volatility and low returns. And because thematic investing is new within the last 20 years, “fad” funds can crop up and disappear in a matter of a decade. As such, investors should conduct their due diligence, as with any other investment.

Thematic vs Traditional Investing

Thematic investing is a strategy that offers focused exposure on assets based around a specific objective or idea – putting your money into “themes,” if you will. These themes may be designed around research into long-term market trends, personal values and beliefs, or social ideas.

Thematic strategies are similar to other types of investing in that you select assets that fit a particular box. In sector investing, for instance, you may target companies in healthcare, energy, or manufacturing sectors, while region investing puts your money to work in specific markets, such as Europe or Asia.

But unlike other strategies, thematic investing tends to include investments across sectors, industries, and valuation. For example, someone interest in environmentally friendly companies might invest in large- and micro-cap stocks in tech, manufacturing, and healthcare, thus cutting across both style and segment.

Why Thematic Investing?

Thematic investing provides a way for investors to identify and capitalize on global trends in a new way. Rather than walling yourself off, you gain exposure to long-term trends, ideas, and insights across sectors.

Plus, thematic investments give you a chance to capitalize on potential created by economic, technological, and social developments. By rallying around a theme or set of themes, rather than sector or style, you can follow your moral compass across asset classes and international borders.

Plus, thematic investing provides a more personalized strategy, as you can focus on assets that match your goals and interest and expose yourself to innovations that positively impact the world.

Top Thematic Investment Strategies

There are literally dozens, if not hundreds, of thematic investing strategies that range from broad, global ideals to granular beliefs. Sometimes, this is as simple as investing in emerging markets, where you buy into companies in countries like Mexico and Russia.

But thematic investing can also be based on personal values, leading some investors to build their own themes by handpicking their investments. But for those who don’t have the time (or money) to build a personalized portfolio, many brokers offer thematic funds based on hordes of data and research.

For instance, Fidelity offers classic themes like sustainable investing and outcome-oriented portfolios. But they also offer “Disruption” and “Megatrend” funds, too, which look a little different.

Similarly, BlackRock uses five “megatrends” to guide their themes, including climate change, shifting economic power, and technological breakthroughs. From these, they’ve created funds to address values such as Global Clean Energy and Digital Security.

Because different brokers offer their own thematic funds, investors have a plethora of options at their disposal. We’ll explore some of these themes in more detail below.

ESG Investing

Environmental, Social, and Governance (ESG) investing, or sustainable investing, throws your money where your values are. These funds invest in companies that limit their environmental footprint, support their employees, or provide genuine value to their shareholders and communities.

ESG funds may focus on any or all factors of ESG investing, though typically, it’s up to the investor to decide which is most important to them. After that comes the hard part: deciding which assets fit the metaphorical bill.

For example, an environmental theme may focus on companies that minimize their carbon footprint, as well as corporations that fund clean energy research. A social fund could include companies that promote women’s leadership, are minority-owned, or champion safety records. And governance-based strategies may consider a company’s board composition, capital allocation, or dedication to shareholders and communities.

Emerging Markets Investing

Emerging markets investments focus on economies that experience rapid growth – but still have room for advancement. This separates them from developed economies that have reached their potential and developing economies which haven’t yet hit the rapid growth that brings both great gains and volatility.

Emerging markets bring unique investment risks to the table, particularly for investors who jump aboard at the cusp of “emerging” and “developed.” One example of this phenomenon is China; by the time most investors realized how fast China was advancing, it was bordering on its status of economic powerhouse.

Investing at this point can be costly as emerging economies don’t always develop linearly. Political upheaval, natural disasters, and international relations can seriously stunt economic growth (and slash stock prices).

Still, emerging markets such as Mexico, India, and Russia bring with them great potential – and the ability to make a change by investing in companies with great promise.

Megatrend Investing

Megatrend themes are unusual in that they focus on how demographic and resource changes impact long-term profits. They take advantage of changes in the societal and investment landscape that occur over decades, rather than short-term business cycles.

Such slow-moving trends may provide benefits to investors who anticipate long-term, market-shaping events, such as aging populations and decreased resources.

For example, a water sustainability fund may focus on companies that provide clean drinking water to areas of the world without access, as well as companies that clean up polluted water sources. Agricultural investing is another rising megatrend, as growing populations continually increase strain on current food supply systems.

Disruptive Investing

Disruptive themes focus on companies, business models, emerging industries, and technology that disrupt the status quo and push for social evolution. Such funds seek to understand shifts in long-term profits while also benefitting from how quickly new innovations disrupt “business as usual.”

One example of a disruptive fund is Fidelity’s Medicine Fund, which taps into companies that explore the 95% of rare diseases without a cure. Tech funds that focus on early-stage inventions are also popular, such as cloud computing and autonomous vehicles.

Even finance can be considered a disruptive investment, as companies work to develop fintech that securely automates payment processes.

Outcome-Oriented Investing

Outcome-oriented themes are nothing new, but the rise in thematic investing has led to a resurgence in their popularity. These funds help people invest in specific objectives, such as weathering volatile markets, minimizing risk, and protecting against inflation.

For example, an investor might invest in funds that provide exposure to sectors that perform well during times of increased volatility or inflation, while at the same time investing in growth funds that seek high returns.

Considerations on Thematic Investing

Thematic investing has only been around for a couple of decades, and the rise and fall of dozens of thematic funds has led some investors to equate the practice with fad-chasing – that is, jumping onboard a newly-launched fund because it speaks to what we shouldinvest in morally or ethically, rather than financially. This is compounded by thematic funds that are too narrow, which then drop off the face of the earth when their underlying trend peters out. (Just look at the dot-com bubble twenty years ago.)

In fact, according to Morningstar, the proportion of thematic funds that survive over a 15-year span is startlingly low – less than 15%.

Source: Morningstar

However, those funds that broach the $50 million threshold tend to have significantly higher 5-year survival rates. Unfortunately, it’s difficult for historically short-lived funds to broach $25 million – let alone $50.

Source: Morningstar

These numbers show why it’s important to recognize that not all thematic funds are created equal. Some materialize just in time to capitalize on investor enthusiasm that ultimately waxes and wanes in popularity and sustainability.

To avoid this trap, it’s crucial to do your homework on thematic funds and securities – as with any investment – and find research-based, long-term perspectives (such as ESG investing). An investment that’s only good for five years before the world loses interest is an investment prone to volatility…and instant collapse.

Additionally, investors should beware that investing in narrow themes (especially only narrow themes) may stunt diversification efforts, leaving you more vulnerable to market volatility. You can offset this risk in a few ways, such as selecting broad-spectrum thematic funds, minimizing how many assets you hold in a particular sector, and investing in a variety of thematic funds that still align with your goals.

Incorporating Thematic Investing in Your Portfolio

If you’re ready to put your money where your morals are, the first step is to decide which themes, values, and ideas are important to you. Then, it’s time to research which ETFs and mutual funds follow these theme-based goals and outcomes, particularly those with a longer history or track record of positive performance and intelligent investments.

Keep in mind that you’ll also need to consider what mix of broad and concentrated funds is right for you. 

Typically, broad funds provide more diversity and a calculated balance between risk and return, though they may stray slightly from your desired values. However, while concentrated narrow their focus, they also tend to hold fewer securities at the expense of less diversity and increased risk against the broader market.

Broad funds are usually recommended for investors who want to invest with their morals while mitigating risk. But concentrated funds have their value, too, particularly as functional “building blocks” that can help construct a robust, well-rounded portfolio. And while many thematic funds are ill-suited to stand as the core of your investment portfolio, some broad funds – like the Global X Thematic Growth ETF, for example – provide enough diversified and benchmark exposure to serve as a core allocation.

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