Thematic investing is on the rise. In late June, it was announced that assets held in thematic ETFs had reached a value of $133bn, up from $27bn before COVID-19 struck.
Thematic investing tends to appeal to those who are looking for longer term gains, rather than those who are after a quick win. But what exactly is thematic investing, what are the benefits, and where are the potential risks?
What does thematic investing involve?
Investor communications firm Broadridge defines thematic investing as “an approach which aims to gain exposure to companies which will benefit from clear long-term structural changes resulting from political, economic and social forces”. Essentially, it offers focused exposure to a particular theme – but differs from sector investing. While sector investing focuses on a single sector, thematic investing aims to capitalise on either long-term or short-term trends by buying stocks or other investments that fit the same theme, but which can span multiple sectors.
An example could be fintech-themed investing, which could include companies specialising in anything from digital payments to blockchain to crowdfunding; or disruptive communications, which could include social media companies, mobile phone operators and semiconductor manufacturers.
What are the benefits of thematic investing?
The scope of thematic investing is boundless – as CIO and portfolio manager, Roger Nusbaum, says, no theme is “too far out there”. There is a great deal of flexibility, which means that investors can focus purely on the themes in which they have a personal interest, or in which they have experience.
Because of the potential growth of themes that back major trends, there is also the potential for incredibly high rewards when thematic investing is done right.
What risks are involved in thematic investing?
Any type of investment that can offer huge returns will generally also come with higher risk levels than other investment types – and this is true of thematic investing. Volatility can be a major concern – particularly when there is a very narrow focus on a particular theme – and often, there may be no guarantee that a certain theme will perform strongly, either in the short or the long term.
As Anna Ginzburg of Bank of America says, “There will always be a lot of risks. Trends take time [and] you’re bound to have short-term volatility.”
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