Investing in themes: what investors need to know

For investors who want to invest in a specific theme, it’s never been easier.

There are scores of funds that focus on a basket of stocks whose fortunes are tied to a specific theme. By investing in a thematic fund, investors are gaining broad exposure, as opposed to trying to identify which individual stocks or handful of stocks will benefit from the theme.

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Thematic investing is an attempt to pre-empt future trends and then invest in the sort of companies that will, in theory, benefit.

It’s not a new concept. For example, those investing in the late 1990s may recall the ‘Internet funds’ that coincided with the technology bubble.

However, the number of different themes that investors can gain exposure to today is much greater and includes artificial intelligence (AI), battery technology, cloud computing, clean energy, and demographics, such as an ageing population.

In this guide, we highlight key things for investors to consider when investing in themes, but first, let’s cover the two different approaches.

Actively managed funds investing in themes

Funds that are actively managed are overseen by a professional investor. The investor typically screens for shares that meet certain criteria for the theme and then picks a selection of companies from the investable universe.

Thematic funds are managed in a similar way as other active funds, with shares entering and exiting depending on the manager’s conviction and where they are seeing the best opportunities.

Most are structured as open-ended funds, although some are active exchange-traded funds (ETFs). For some, an active ETF sounds contradictory. However, it’s important to remember that an ETF is just a wrapper, or structure and that they can blend fundamental active views with quantitative techniques in developing their investment strategy. While historically this structure has been used to track an index of stocks, there’s nothing to stop it being used to track a basket of shares actively chosen by a fund manager.

Our recent active ETF explainer runs through in more detail why active ETFs are expected to become more common as a fund structure.

Aberdeen, our parent company, is preparing to trade on the London Stock Exchange two active ETFs designed to benefit from two themes driving profound changes in the global economy: the re-shaping of global supply chains and the transformation in demand for raw materials. The funds are: abrdn Future Supply Chains UCITS ETF and abrdn Future Raw Materials UCITS ETF.

abrdn Future Supply Chains UCITS ETF focuses on companies well positioned to capture value from the re-shaping of global supply chains, technologies and energy systems.

abrdn Future Raw Materials UCITS ETF invests in companies involved in the exploration, mining and refinement of future raw materials. It takes an active view on the expected most relevant materials and focuses typically on five core materials: copper, aluminium, lithium, nickel and rare earth elements. Although, this may change over time.

The two ETFs are open for applications via interactive investor until 28 July prior to their respective admissions. Find out more here on our IPO page.

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Both active ETFs start with an initial universe and screen for certain criteria and qualities. The result is around 70 stocks for abrdn Future Supply Chains UCITS ETF and around 40 to 60 stocks for abrdn Future Raw Materials UCITS ETF.

As both are actively managed strategies, changes will be made to the portfolios when the fund managers see fit.

The duo add to Aberdeen’s range of thematic funds, which includes abrdn Future Real Estate UCITS ETF GBP (LSE:AREG) and the abrdn SICAV I - Future Minerals Fund.

Thematic Index ETFs

A thematic Index ETF tracks an index of companies expected to benefit from the same trend. Rather than rely on the stock-picking ability of a fund manager, the investor gains rules-based exposure to companies that meet certain criteria for the theme.

When an index tracking a theme is constructed, companies are usually screened using some sort of revenue requirement. For example, some thematic index ETFs invest only in companies that are earning at least 50% of their revenue from a theme.

Companies with higher revenue exposure are seen as being more of a “pure play” on the theme. However, this potentially creates liquidity issues, as some companies with the highest revenue exposure are small. As a result, they are often thinly traded. This can add to costs when the ETF needs to rebalance. 

As a result, some ETFs adopt looser requirements for inclusion. There’s no right or wrong answer and there’s always a trade-off between purity and liquidity.

It’s important to find out how the ETF is screening companies for the theme. Also, bear in mind that there are several index providers with their own methodologies. As a result, the stocks and weightings for ETFs offering exposure to the same theme can notably differ, as can the performance.

Examples of funds investing in themes

Investing in technology shares is a well-established theme, with investment trust duo Polar Capital Technology (LSE:PCT) and Allianz Technology Trust (LSE:ATT) providing broad exposure.

Other funds focus on a sub-theme within the broader technology sector, such as Sanlam Global Artificial Intelligence, L&G Cyber Security ETF (LSE:ISPY), iShares Automation&Robotics ETF (LSE:RBTX), Pictet Robotics and First Trust Cloud Computing ETF (LSE:FSKY).

Another technology play, which is a much newer theme, are funds providing exposure to cryptocurrency-related companies such as VanEck Crypto & Blockchain Innovators ETF (LSE:DAGB) and Invesco CoinShares Global Blockchain ETF (LSE:BCHS). 

Another well-established theme are funds that invest in companies tapping into water, which is vital for both human life and commercial activity. Funds specialising in this theme include iShares Global Water ETF (LSE:IH2O), Pictet Water and Regnan Sustainable Water and Waste.

The environmental, social and governance (ESG) theme has become more prominent over the past decade. This led to a flurry of new funds specialising in renewables, with some funds offering exposure to specific types of clean energy. Examples include iShares Global Clean Energy Transition ETF (LSE:INRG), Guinness Sustainable Energy and Pictet Clean Energy Transition.

The flavour of the month now are funds investing in defence companies, with VanEck Defense ETF (LSE:DFNG) and HANetf’s Future of Defence ETF (LSE:NATO) proving popular. Investor interest in defence stocks has been piqued following significant increases in European defence spending among NATO members. In addition, the sector is running hot, and defence as a theme has been a strong performer over the past two years.

Other examples of funds investing in themes, some of which are niche, include: EMQQ Emerging Markets Internet ETF (LSE:EMQP), Morgan Stanley Global Brands Equity Income fund,VanEck Video Gaming & eSports ETF (LSE:ESGB), iShares Healthcare Innovation ETF (LSE:DRDR) and Sarasin Food & Agriculture Opportunities.

Is it the same as sector-based investing?

The lines between sector-based investing and thematic investing can seem blurred. Is investing in a healthcare ETF investing in the healthcare sector or an attempt to benefit from the “theme” of increased healthcare spending as populations age?

The answer isn’t always clear. However, it’s important to note that thematic investing isn’t sector constrained.

For example, an electric car ETF may have a heavy weighting towards big-name electric car manufacturers or traditional car manufacturers with big investments in electric technology.

However, it could also have some weighting towards other companies that may benefit from the broad theme of electric cars. This could include companies involved in the extraction and sale of lithium, a key part for batteries. It could also be weighted towards infrastructure companies expected to help with matters such as the rolling out of car charging points.

• Key trends and top-performing funds so far in 2025

The risks of buying at a peak

Even if you correctly identify a trend, how can you be sure that its future growth is not already priced in?

As ever, it’s important to take a step back and assess valuations. With some themes, there’s a tendency for strong gains over a short period. This is often accompanied by investors piling in to participate in a theme and its performance, which results in valuations becoming more elevated.

Bear in mind that if the theme is running hot, valuations could become overheated and unsustainable relative to fundamentals, such as company earnings. 

The danger, therefore, is spotting a theme too late and buying when valuations are high – resulting in the likelihood of returns being lower in future. 

Investor sentiment towards themes can quickly change, for better or worse. For example, in 2020 clean and renewable energy companies experienced a significant increase in investor interest. However, demand cooled when interest rates started to rise in late 2021 as investors away from growth companies.

Kenneth Lamont, a senior analyst at Morningstar, says that some thematic ETFs “have delivered bursts of eye-catching performance, while others have failed to gain traction”.

When considering themes, ask yourself which ones you’re interested in and then consider their prospects. If the theme has been in vogue, consider whether this is likely to continue.

What’s the cost?

Thematic ETFs are often more expensive than the more traditional ETFs. An ETF tracking the S&P 500 or FTSE 100 can charge less than 0.1% per year, while thematic ETFs usually charge somewhere north of half a percentage point.

Actively managed thematic fund charges can also command a premium to the typical fund charge. Funds that invest in developed markets tend to cost 0.85% to 1% a year.

However, some may charge less than the average, with an example being the aforementioned abrdn Future Supply Chains UCITS ETF and abrdn Future Raw Materials UCITS ETF. They have yearly ongoing charges of 0.6% and 0.45% respectively.

As ever, value is subjective and it’s the performance of the fund net of fees that matters. There’s nothing wrong with paying a premium for a fund, providing the outcome is satisfactory.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.