Thought Leadership  •  November 03, 2021

Start the Conversation

Honeypot Field to Catch Bots
Honeypot Field to Catch Bots

What is Thematic Investing?

All investing is done with an eye toward the future. You purchase stock in a company because you expect its value to rise as it becomes more successful. Traditional forms of investments are made based on the strength of a particular company’s prospects or recent performance.

In recent years, however, a growing number of investors are approaching their portfolios with a broader perspective that takes the bigger picture into account. By making investments based on larger trends rather than individual stock characteristics, they are finding stronger opportunities and taking advantage of greater returns. The umbrella term for this philosophy is thematic investing, and it is taking hold as one of the more popular strategies right now.

Understanding the Basics

What is thematic investing? At their core, thematic investing strategies are those that are based on following larger macroeconomic themes. In the past, investors primarily used methodologies that separated opportunities based on geography, asset classes and individualized performance. Thematic investing, on the other hand, seeks to target opportunities through the lens of trends. These can range from overarching structural trends such as new technologies, macroeconomic trends such as inflation, or microeconomic themes that develop at a company level such as management structures. At every level, these trends can be either cyclical or one-off shifts in existing paradigms.

A very basic example of a theme than can influence investment opportunities is a disruptive new technology. For instance, the introduction of the iPod not only lifted Apple’s stock, but also that of other tech companies who rushed to carve out their own slice of the personal music player market. Investors who capitalized on the opportunity did so by recognizing how Apple’s success would lead to larger changes in the industry overall.

The Connection to ESG Investing

A lot of attention has been paid recently to the idea of environmental, social and governance (ESG) investing. This refers to investors choosing where to invest based on how a company’s behavior aligns with their personal values regarding environmental policies, social justice, political activity or management structure. ESG reporting from companies has become an important tool for guiding an investor’s decisions. In this way, ESG and thematic investing share several commonalities. For example, thematic ESG funds exist that can help direct investments based on companies’ ESG principles and how larger trends may influence the markets in related directions.

Why Do Investors Choose Thematic Investing?

It isn’t hard to understand why adhering to a thematic or ESG investing strategy might appeal to investors. By paying close attention to the ways in which the world is changing, it becomes easier to recognize which stocks or funds could stand to benefit. Although no approach or strategy is entirely risk-free, following a thematic or ESG investing plan has a significant amount of potential. Traditional broad indexes typically reflect the behavior of the entire market, but the thematic method is more concerned with spotting specific developments that could drive certain stocks to higher levels of return.

Long-term investors can benefit a great deal from this methodology. This is especially true when they invest across a variety of themes that perform at different levels at different times, because this approach often means investments are highly concentrated in individual sectors. As long as these decisions are handled with care, it can mean the investor is in a better position to withstand a disruption.

In many ways, themes can be a better way to research stocks than the traditional methods. Following a thematic investing strategy can help put an investor in a stronger place to benefit the next time a substantial change rocks the market.


Joseph Seitz

Marketing Analyst, DFIN