The world is changing fast, and so are the ways that investors are spending their money.

More than ever before, investors today want more than just financial returns. Some want to invest in companies that share values that they believe in. Some want to invest in new technologies that they anticipate might be the next big change that impacts day-to-day life.

They want returns and more.

From anticipating the next tech disruption (think autonomous vehicles) to financially supporting companies that have certain values (perhaps sustainability or gender equity) to wanting to balance risk in a portfolio, investors have more say than ever about how and why they want to invest. 

And so, thematic funds are increasingly in demand. Here’s what they are and what you should know about them.

What is thematic investing?

Thematic investing in general seeks to identify “potential opportunities created by economic, technological, and social developments that unfold over long periods of time.”

Traditionally, investments are selected based on categories that include region, economic sector, and style (growth, shares, property, defensive, cash, or fixed interest). Thematic investing, however, can pull from all of these more traditional categories at once.

Another key difference is that traditional strategic asset allocation is typically backward-looking, analyzing past business and stock performance as a predictor of future success, whereas thematic investing is forward-looking.  Traditional investing doesn’t consider emerging market trends or future-oriented perspectives on the economy. Thematic investing is future-oriented, considering long-term global trends.

Thematic investing is also different in that it takes a broad perspective on macroeconomic trends. Its strategies extend to the consideration of ideas, beliefs, and values in the selection of financial products. This broad take requires an in-depth understanding of “underlying drivers of value creation and risk.” 

Even so, investment firms can have vastly different investment strategies when it comes to their approach towards thematic investing.

Fidelity, for instance, offers a range of thematic funds, including those focused on disruption (innovative business models, emerging industries, and technologies that are changing the status quo, megatrends (long-term trends affecting our world), environmental, social, corporate governance (ESG) (return with a purpose), outcome oriented (outcomes based on specific objectives), and differentiated insights (unique insights and industry-leading investment experience). 

BlackRock, however, centers its thematic investing around five megatrends driven by technological breakthrough, including rapid urbanization, climate change and resource scarcity, shifting economic power and demographic and social change.

These different approaches give investors different frameworks to consider and ultimately select based on their individual values, preferences, and interests. 

Why invest thematically?

Thematic investing is increasingly attractive to investors who want to align their investments with their personal values and think outside the box of benchmarks. And, they generally function well as one piece of a portfolio. 

Thematic investing is more concentrated than a traditional mutual fund. There are many ways to invest thematically, from choosing a theme to selecting a broad or narrow focused fund. Broad funds invest across companies that hold specific values in an example of ESG investing, for example. 

Narrow funds might only invest in one specific technology, like autonomous cars. Or, in a small number of companies that are pioneering blockchain technology and renewable energy innovations. One example is exchange-traded funds (ETFs) that are focused on “high-growth industries” like gaming or cannabis. Sometimes, these have success.  

Consider HACK, the first cybersecurity-focused exchange-traded fund (ETF), which was successful after an international cyberattack in June 2017. But, success isn’t always guaranteed and the more narrow the fund, the greater the risk. According to iShares, there is “no guarantee that research capabilities will contribute to a positive investment outcome.”

It’s interesting to note that there have been multiple bitcoin ETF proposals to the SEC, none of which have been approved. If approved, could cryptocurrency be the next big thing?

Thematic investment vehicles are professionally managed. This means that the legwork of research and nuanced knowledge of the theme in the broader perspective of the market is taken care of. Because thematic investing is centered around emerging trends, anticipating what may or may not change the norm, they require a comprehensive understanding of value creation. 

Is investing thematically a good idea?

The answer isn’t black and white and depends on your investment temperament and goals.

Thematic investing is considered seductive by some, with its narrative and performance chasing. Others see it in more positive light, as investing in global transformation. In a world that’s always changing, investing in ingenuity and innovation that make the world more sustainable in the long-term offers longevity. 

There is no one correct answer.

Thematic investing likely fits if you as an investor have a specific passion about a specific developing technology or value set. But, if you are casually looking to expand your portfolio, it might not be the best option.

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