Thematic Investing: Question & Answer | ETF Trends

The blog responds to frequently asked questions about thematic investing by detailing what it is and major thematic trends.

What is thematic investing?

Thematic investing is an investment strategy that focuses on specific themes or trends in the market rather than traditional asset classes or sectors. It involves selecting investments in companies or assets expected to benefit from a particular theme or trend. These themes can be broad, such as clean energy or technology innovation, or more specific, like e-commerce or cybersecurity. Thematic investing allows investors to align their portfolios with their beliefs, values, or expectations about the future, and it can provide diversification and potential growth opportunities. Thematic investing has become very popular in recent years, with the potential for themes to provide outperformance to the broad market.

Why should advisors and investors consider thematic investing?

Investors may consider thematic investing for several reasons.

  • Diversification: Thematic investing can provide diversification beyond traditional asset classes, potentially reducing risk by spreading investments across a range of companies or assets connected to a specific theme. Growth potential: Themes and trends can lead to high-growth opportunities. Investing in sectors or technologies expected to expand rapidly can offer the potential for attractive returns.
  • Alignment with values: Thematic investing allows investors to align their portfolios with their beliefs and values. For example, those concerned about environmental issues can invest in clean energy themes.
  • Innovation exposure: Thematic investing often involves emerging industries and disruptive technologies, offering exposure to innovation and potentially benefiting from market shifts.
  • Tailored portfolios: Investors can customize their portfolios based on their outlook and convictions about specific themes, which may lead to more personalized and focused investment strategies.

Investing in themes can benefit both clients and advisers. By learning and investing in specific themes, advisers can become more engaged with clients by helping them understand what’s driving the market and news cycles.

What is VanEck’s approach to thematic investing?

A unique attribute of VanEck’s thematic suite is our focus on what we see as long-term secular trends among industries that we believe are likely to drive long-term performance. VanEck approaches thematic ETFs with a focus on pure-play exposures, meaning that companies included in most of our portfolios must derive 50% of revenues from the specific theme on which they are focused.

What are some misconceptions about thematic investing?

Some of the biggest misconceptions about thematic investing are that it is simply chasing fads or you only get exposure to large tech companies like Apple, Nvidia, or Microsoft. Thematic investing involves selecting investments based on specific themes or trends rather than traditional factors like sectors or geographic regions. Here are some common misconceptions about thematic investing:

  • It’s only for niche or speculative themes: Thematic investing can cover many themes, from technology and healthcare to sustainability and demographics. It’s not limited to niche or speculative ideas.
  • It’s a short-term strategy: Thematic investing can be short-term and long-term, depending on the theme and the investor’s goals. Some themes may play out over many years, making them suitable for long-term investment.
  • It’s risk-free: Thematic investments can be riskier than broad-market investments. If a theme doesn’t materialize as expected or faces regulatory challenges, it can result in losses.
  • It’s always a high cost: While some thematic ETFs and funds may have higher expense ratios, not all thematic investments are costly. Investors can choose cost-effective options and tailor their thematic strategy to their budget.
  • It’s incompatible with diversification: Thematic investing can be diversified within the chosen theme. Investors can select multiple companies or assets within a theme to spread risk while focusing on the desired trend.
  • It’s purely based on trends, not fundamentals: Successful thematic investing combines a thematic approach with fundamental analysis. It’s important to assess the companies’ or assets’ financial health and growth potential within the chosen theme.
  • It’s primarily for retail investors: Institutional investors also engage in thematic investing, recognizing the long-term potential of specific themes in their portfolios.
  • It’s the same as sector investing: While thematic investing may overlap with sector investing, it’s distinct. Thematic investing focuses on broader, cross-sector trends that may cut across multiple industries.

What are some of the significant thematic trends?

  • Clean Energy and Renewable Technologies: With a growing emphasis on combating climate change, investments in clean energy sources like solar, wind, and electric vehicles rose.
  • Technology and Innovation: Themes like artificial intelligence, automation, and cybersecurity continued to attract investment due to their transformative potential.
  • Healthcare and Biotechnology: Healthcare innovation, biotech research, and telemedicine investments were driven by an aging population and the ongoing pandemic.
  • Digital Assets and Fintech: The digitalization of financial services and the rise of cryptocurrencies were significant themes in investing.
  • Genomics and Precision Medicine: Advances in genomics and personalized medicine were gaining attention for their potential to revolutionize healthcare.
  • Infrastructure and Urbanization: As cities expanded and aging infrastructure required upgrades, investments in smart cities, transportation, and infrastructure development were growing.
  • Water and Resource Scarcity: As water resources became scarcer in some regions, investments in water-related technologies and resource management gained importance.
  • Aging Population: Investing in companies addressing the needs of the aging population, including healthcare, senior living, and retirement solutions.
  • Cybersecurity: With the increasing reliance on digital technology, investments in companies providing cybersecurity solutions were in demand.
  • ESG (Environmental, Social, and Governance) Investing: Investors increasingly focus on companies with strong sustainability practices and ethical governance.

How can investors use ETFs to get access to market themes?

ETFs can be valuable tools for investors seeking to participate in specific and targeted economic opportunities. Often, these are referred to as “themes, ” which may be based on advancements such as technology or can be solution-driven—solutions investors seek to combat particular market conditions, like inflation. While ETFs that target themes generally tend to be concentrated, their addition to a portfolio is intended to add value from a return perspective and aid with diversification and overall risk. VanEck has purpose-built various ETFs for accessing timely and relevant trends shaping the modern investment landscape.

How can investors learn more about thematic investing?

Investors who subscribe to VanEck’s thematic investing insights can expect timely updates on the new and evolving discoveries and innovations potentially driving future performance across various industries.

Originally published by VanEck on November 15, 2023. 

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