The world around us is continually changing. We think that identifying major developments and identifying the stocks that stand to gain the most from them is one of the keys to investing success.

Thematic investing is a strategy that prioritises long-term industry trends over short-term investment decisions, making it possible for investors to identify fundamental, single-sector changes.

Table of Contents

What is Thematic Investing and how does it work?

The challenge of selecting appropriate themes

What are examples of major macro trends?

How to assemble a thematic driven portfolio

Pros and cons of Thematic Investing

Concluding Remarks

What is thematic investing and how does it work?

Thematic investing is increasingly being employed as a strategy in multi-asset portfolios. It tends to disregard national borders, concentrating instead on businesses and assets from around the world that may profit from changing market circumstances. In essence, thematic investment is about finding developing trends and recognising the potential for structural change in society. To do that, it’s important to take a top-down approach to the global economy and financial markets while remaining focused on the final result. Rather than assessing specific industries, assets, or investment types, individuals should first strive to attain particular objectives.

When looking at developing trends, such as electric cars and remote work, investors who wish to profit from such developments can use “thematic” exchange-traded funds (ETFs). A theme can be defined in many ways, and thematic ETFs already have assets that follow this theme. Big data, climate change, demography, future mobility, and comprehending the post-Covid world are all topics that have been highlighted as having the potential to influence the future.

The challenge of selecting appropriate themes

Technological advancements and scientific discoveries that previously took decades to make are now occurring in a matter of years. At the same time, changing populations and climate change are creating global upheaval. The advent of Industry 4.0 — which refers to the current developments of industrial technology, automation, and data sharing — has caused the global investment environment to change. In addition, continuously altering industrial capabilities and consumer preferences have also both been impactful.

For those searching for a particular nation, sector, or investment style, there’s almost certainly an ETF that is managing a similar investment vehicle. Newer themed ETFs offer small positions in rapidly developing sectors.

Identifying a profitable investment theme is difficult, and it is impossible to guarantee that a person’s choice will lead to success. Asset owners are constantly looking for indications that a future event or circumstance will occur or continue in a way that will aid their asset investment. Although hypothesis testing is essential, it is important to remember that the aim is to remain focused on the occurrence of real events rather than theoretical happenings.

The challenge of selecting appropriate themes

What are examples of major macro trends?

While some changes in trends are short term, macro shifts refer to global trends that affect a large population on a huge scale. This takes place over a longer time frame. Major technological advancements made over the last decades are typical examples of a macro trend, as the emergence of new technology has led to exponential development in almost every sector. For example, in 2017, there were a reported 17 billion mobile devices on the market; in 2030, this number will have increased by 125 billion.

Ever-changing demographics

A shift in demographics, along with longer lifespans and more contemporary lifestyles, could dramatically impact healthcare and consumer behaviour in the future. Between now and 2030, there will likely be a 45% rise globally in the number of individuals over the age of 60.

Rural-urban exodus

It is estimated that two-thirds of the world’s population will live in cities by 2050. This figure was less than one-third of the global population in the 1950s, and so, better infrastructure and new methods for running businesses will have to be created to deal with the mass movement of people.

Climate change threat

The threat of global warming has led to a need for a more environmentally sustainable future. Consequently, the amount of energy produced by solar and wind is expected to see a 43% increase by 2050.

Novel global wealth dynamics

The emergence of significant global wealth could trigger growth in the newly wealthy consumer base, concentrated in Asia and developing countries. Emerging market economies are expected to make up 6 of the 7 largest economies in 2050.

What are examples of major macro trends?

How to assemble a thematically driven portfolio

There are a few guidelines worth following when choosing specific stocks or asset types.

1. Pinpointing future trends

Investors must recognise both trends and trendsetters to find profitable investments. It is important to consider the type of companies that may exist in the future. For example, somebody may have cause to think that Blockchain use is destined to increase. This is the prevailing tendency.

After a pattern has been discovered, it is wise to keep certain things in mind:

  •   Can the shift be attributed to a structural change in the market?
  •   Is it short term or long term in nature?
  •   Will the current trend lead to any significant disruptions?

2. Selecting industry sectors

There are several things to bear in mind when conducting preliminary research. The strengths and weaknesses of various asset classes should be investigated and compared to each other. While benchmarking, both the volatility (or risk) of the topic, and the overall market, should be measured. Depending on the size of the portfolio, other variables will also be relevant, including the degree of correlation between assets, the potential for major risk events, and the sensitivity of investments. In a complicated investment environment, investors improve their chances of delivering better returns by analysing sector exposures and then selecting where and how to invest.

Portfolios can be personalised and customised to match an investor’s risk profile. To make appropriate predictions, all of the industries and sectors that might profit from the long-term trend must be considered. Investors may choose between a market cap-weighted or risk-weighted mix of stock/exchange-traded funds (ETFs) for their portfolios. For investors with a moderate appetite for risk, portfolios can be made a little more flexible and holdings adjusted to suit their individual needs.

3. Profiling firms

Next, the investor focuses on businesses that may be market makers in certain areas. It is also critical that equities are correctly placed in the portfolio, although this kind of gamble may be considered more opportunistic than fundamental. Investing in businesses based on fundamental research may help increase an investor’s safety margin, but adopting this methodology also entails purchasing shares at reduced prices, which lowers the average return.

4. Modify and adjust your portfolio

Rebalancing portfolios is a standard practice that aims to produce the most return with the least amount of risk. Once the performance of the component strategies begins to diverge, investors should update their portfolio to bring it back into alignment with their original strategy. Investment ideas should be included as they emerge to guarantee that the stock portfolio is constantly aligned with the underlying topic.

5. Be patient

To maximise the chances of a successful outcome, it should be understood that certain projects will profit from a thematic framework while others will not. Those investors that have a distinct presence, make swift decisions, and conduct operations effectively are more likely to see an exponential return, and timing is also an essential consideration in any investment opportunity. For long-term profits, patience is vital.

eToro thematic investing

With eToro’s investment portfolios, investors can embrace a sensible and creative approach to personal investment. For individuals who favour a well-balanced portfolio and the opportunity to select market sectors they understand and can connect to, it is worth opting for a fully allocated portfolio.

GoldWorldWide had a 12% return in the last 12 months, and so this company is one option for those who prefer investment choices that offer more security.

For investors willing to take a little more risk, CryptoEqual is arguably eToro’s most dynamic investment portfolio, having witnessed a stellar return of 289% in the past year.

eToro offers plenty of investment choices, including:

  • InTheGame:  InTheGame includes top gaming businesses and provides exposure to one of the world’s hottest and biggest marketplaces. In addition to gaming, the portfolio includes businesses that make chips and work in VR/AR.
  • FashionPortfolio: The FashionPortfolio is intended to assist long-term investors to profit from the fashion sector’s possibilities. Sportswear and athleisure, lingerie and underwear, corporate clothing, footwear, casual, off-price, and other product categories are included in this investment approach.
  • Renewable Energy: Global public businesses in the renewable energy sector are included in this portfolio. Solar energy, waste, recycling, wood fibre, electrical infrastructure, battery charging, and sustainable transportation are examples of these industries.
  • DRIVERLESS: This innovative themed portfolio provides exposure to top automotive, high-tech, and software developers from North America, Europe, and Asia.
  • IHI: iShares offers worldwide trend following investment methods. The fund focuses on portfolio diversity and durability. The iShares US Medical Devices ETF tracks and reports on US medical device investments. New York-based BlackRock Fund Advisors oversees the ETF.
  • SOXX: The iShares PHLX Semiconductor ETF is an exchange-traded fund that is traded in a manner similar to stocks, and represents a collection of various assets that follow and are affected by a certain financial index, such as the Philadelphia Semiconductor Index.

And many other options can be found here.

Pros and cons of thematic investing

After understanding the main elements of thematic investing, it is worth discussing its main advantages and disadvantages.

Pros

When compared to traditional or passive fund methods, one of the most significant advantages of theme investing is that it is much more focused. To give you an example, mutual funds are typically composed of 40–80 companies in their respective portfolios. Because of the focus (and possibly overemphasis) placed on diversity, returns are more likely to be much lower than potential. Admittedly, diversifying your stock selection across different industries is not necessarily the most effective approach for achieving long-term success.

When compared to sector-specific investing, thematic investing makes it simpler to make sound investment choices. Thematic investment is best carried out by investors who have a thorough understanding of the companies and trends in the area at issue. As a consequence of their vast expertise, the investor has a number of different characteristics associated with their own portfolio. This makes it much simpler to make well-informed choices that will lead to long-term success and profitability.

Thematic investment methods are also extremely adjustable, and the results may differ considerably depending on the preferences of the investor. The presence of this characteristic is less common in other fund strategies, particularly those that track an index. As previously stated, even though themed funds are extremely concentrated , investors may still achieve diversification by creating portfolios with a variety of themes.

Cons

The risk associated with thematic funds is significant since they are reliant on a particular concept or topic that may or may not provide high returns, depending on the market cycle in which they are invested.

If you are an investor in themed mutual funds, you should be aware that the cost ratio will be greater than that of other mutual funds, which is not uncommon. The increased management costs are justified by the fact that it takes extensive analysis, thorough study, and in-depth knowledge to discover a topic, industries, and companies within them.

Volatility is one of the primary issues when it comes to themed ETFs. Essentially, the assumption being made here is that the more narrowly one concentrates one’s attention on a certain subset of sector companies, the more volatile that fund is likely to be.

Pros and cons of thematic investing

Are thematic investing ETFs a good thing?

Thematic investing allows you to profit from current and future trends. Because of its forward-looking character, it may assist you in making investments in “Businesses of the Future.”

Theme-focused ETFs enable investors wanting to stay focused on a certain sector or idea to invest by simply buying shares in an ETF rather than having to conduct research into each company. For example, if an investor recognises the potential of cloud computing, they may invest in the ETF; this will provide them with exposure to the diverse sector at minimal cost and inconvenience.

In terms of investment expense, thematic ETFs are slightly more costly than popular index ETFs, like those based on the S&P 500. The expenses on well-known investment products often run at a fraction of a percent each year. For example, if someone has invested $10,000 in a fund, they are likely to be paying $10 for every $10,000 they’ve invested.

Can thematic investing improve portfolio diversity?

As with any investment choice, it is wise to investigate the goals, risks, charges, and costs of any mutual fund or exchange-traded fund, before purchasing any shares. Fundamentally, an ETF replicates a particular weighted index of equities, and themed ETFs typically use the same structure. Investors will purchase any stock that is part of the index and place it in their portfolio at its appropriate weight. With one share of the ETF, investors get exposure to the entire fund by investing in the whole stock portfolio, and receive fast diversification in the topic and tight diversification among the businesses in the fund.

Online trading platforms democratise investment choices by lowering costs and increasing accessibility. There is a natural tendency to take part in themes — such as strong technological developments — when they are having a significant global impact. However, although many of these trends achieve success, there are just as many that fail. It is important to make sure that the business is liquid and that a product’s popularity and earning potential have long-term staying power before immediately jumping on the bandwagon. Investors should always screen for risk and liquidity and do extensive research, before taking on a thematic investment approach.

Finally, should you delve into thematic investing?

It is entertaining to see if a person’s future forecast is accurate. However, it is more intriguing to note whether or not an investor is willing to back up their claims with money by investing in the trends they believe have significant potential. Emerging possibilities and structural changes that provide higher profits to investors are two of the key components of thematic investment.

A portfolio must balance risk-return in order to achieve financial success. Ordinary lives are constantly being reshaped by the slew of new technical, economic, and geopolitical megatrends, as well as future trends that have already begun to manifest. Staying ahead of the curve will help investors to reap the benefits of these changes.

Check out eToro’s thematic investing opportunities here.


This information is for educational purposes only and should not be taken as investment advice, personal recommendation, or an offer of, or solicitation to, buy or sell any financial instruments. This material has been prepared without regard to any particular investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past performance of a financial instrument, index or a packaged investment product are not, and should not be taken as a reliable indicator of future results. eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this guide. Make sure you understand the risks involved in trading before committing any capital. Never risk more than you are prepared to lose.