What You Need to Know About Thematic Investing

When you hear things like “electric vehicles are the future” or “AI is going to grow and grow,” you may think to yourself, “How do I, a savvy investor, get a piece of that pie?” You can’t yet invest in ChatGPT specifically—but how do you go about investing in AI as a trend?

Thematic investing is an investment strategy that focuses on identifying and capitalizing on top-down, long-term trends that are expected to drive growth and disrupt traditional industries. Like the name suggests, thematic investing circles around a theme—usually an emerging long-term trend (like investing in ChatGPT and all things AI). But instead of investing in individual companies or sectors, thematic investing revolves around macro “themes” that are shaping the future.

While all this may sound appealing, there are significant risks to consider before attempting this investment strategy on your own.

How does thematic investing work?

Thematic investing centers around specific themes, often driven by technological advancements or other “disruptive” macroeconomic factors. Think themes like renewable energy, artificial intelligence, cybersecurity, or blockchain.

This approach to investing tries to predict how major societal shifts will play out and affect the financial system and the economy from the top down. The strategy is based on the expectation that investing in a particular theme is a bigger swing that will produce greater returns.

Thematic vs. sector investing

You might have noticed that thematic investing sounds a whole lot like sector investing, but in fact they’re two distinct strategies. Sector investing typically means betting on stocks in a particular group (like healthcare or energy). Thematic investing, on the other hand, takes a much broader approach, often touching on multiple sectors aligned around a particular theme.

The appeal of thematic investing

Thematic investing is best for aggressive investors with a long-term perspective. Successful thematic investing requires in-depth research and expertise in understanding the underlying drivers and potential impact of each theme.

For those who love “playing the game,” so to speak, another appeal of thematic investing may involve taking a contrarian view. While popular themes might be overhyped and lead to overvalued companies, identifying under-appreciated themes can offer uniquely rewarding investment opportunities.

Thematic investing is not for someone trying to get rich quick. Chosen themes tend to play out over years or even decades. That’s why investors who adopt this approach are looking to benefit from the compounding growth potential of companies that align with these long-term trends.

The risks of thematic investing

The higher the growth opportunities, the higher the risks. Forgive me for pointing out the obvious here: You cannot predict the future. Themes might not play out as expected, and even if they do, not all companies within a theme will perform well. Even if an investor identifies a significant societal shift, that theme might not translate into stock market returns.

There is always going to be inherent risk in betting on how a specific trend will play out. Plus, as I’ve explained above, this strategy requires a long-term outlook. Investors should be prepared for potential short-term fluctuations in the value of their thematic investments.

The bottom line: Don’t get caught up in a trend

“Thematic investing” is a trendy term these days, but it won’t necessarily apply to the casual, everyday investor. Investors should be aware of the high-risk pitfalls to participating in niche thematic ETFs; but at the same time, if done carefully, thematic investment can provide major returns.

If you’re new to investing, it’s considerably less risky to start with mutual funds and ETFs professionally managed by a provider like Vanguard. Here’s our guide to building an easy “set and forget” investment portfolio.

Remember that while thematic investing can be appealing, it should be a part of a well-diversified investment portfolio. As always, you should consult with a financial advisor or conduct thorough research before making any investment decisions.