Whether you're new to the stock market or a seasoned investor, you're probably aware that there are different strategies you can choose from.
Some are as simple as investing in growth stocks, dividend stocks, or value stocks, but there are also more creative investing strategies. These are sometimes referred to as thematic investing.
What is thematic investing?
What is thematic investing?
Not surprisingly, thematic investing refers to investing according to a certain theme. There are no hard-and-fast rules as to what themes qualify, but they tend to focus on future changes such as disruptions, new technologies and megatrends, sustainability, founder-led companies, or subsectors like electric vehicles and cybersecurity.
These thematic baskets are generally put together by brokerages or ETFs, but investors can also invest in such themes on their own.
What you should know
What you should know about thematic investing
Thematic investing is useful if there is a specific industry, technology, or emerging market that you want exposure to. It's also helpful if you want your portfolio to reflect your own values.
One classic example of thematic investing is ESG investing, or investing based on environmental, social, and governance factors. ESG investors take into account the impact that their investments are having beyond the bottom line. For instance, ESG investors may consider the environment, rights and opportunities for underrepresented communities, and governance, including representation in its board of directors.
Another popular thematic approach that takes a different tack is focusing on sin stocks, which include alcohol, tobacco, and firearms stocks.
Thematic investing also gives investors a way to invest in a particular group of stocks that don't belong to a more conventional grouping, like growth stocks, China stocks, or oil stocks.
The strategy isn't necessarily better than investing without thematic funds. Whether you beat the market will depend on the theme that you choose.
Benefits and risks
The benefits and risks of thematic investing
Thematic investing has the ability to deliver outsize returns. For example, if you had invested in a well-constructed artificial intelligence (AI) fund early in 2023 made up of stocks like Nvidia (NVDA -0.8%), you would have likely earned huge returns since then.
Alternatively, a poorly timed investment in a thematic fund could result in significant losses. Electric vehicle stocks have fallen sharply in the last six months over concerns about plateauing demand, falling prices and profitability, and startups that are running out of money.
Investing in a number of thematic funds can also help investors diversify their holdings in new ways. However, if you're investing in thematic ETFs, you should also be aware that expense ratios will be higher than they are for passive ETFs like index funds.
Related investing topics
Example
What's a good example of thematic investing?
If you're looking for thematic investing ideas, you may want to check with your brokerage. For example, Charles Schwab (SCHW 0.0%) has over 40 themes you can choose from, including Water Sustainability, Renewable Energy, and Blockchain.
Those categories show how varied your options can be in thematic investing and that you have a number of options you can use from.
Investors interested in thematic investing can also look to ETFs, which also play on themes like vegan stocks and megatrends like AI and semiconductors, genomics, and globalization.
With a wide range of thematic investments to choose from, investors should be able to find something that fits their risk tolerance and area of interest.
