Interactive Investor

What is thematic investing? 

With a focus on powerful and global themes, thematic investing sees investors putting their money on the future.

Thematic investing is a long term, future focused investment strategy. By following themes early on, your aim is to pre-empt their rise and invest in them before they become global trends of the future. 

An easy way to do this can be to invest in thematic ETFs (Exchange Traded Funds) or thematic funds. Both will invest thematically but ETFs will follow an index to do this, while funds have a manager.

What is a thematic ETF?

Thematic ETFs are similar to normal ETFs. But while normal ETFs invest in a single sector such as 'real estate', thematic ones choose investments focused on a theme or topic, such as 'sustainable infrastructure'. Depending on the theme, the investments of a thematic ETF could be in multiple sectors. So the thematic ETF could benefit from the success of the theme, regardless of the wider sectors' success.

ETFs are considered a low-cost way to diversify your portfolio. But remember that all the investments in a thematic ETF are linked to the theme, so you might want to invest in other investment types to be even more diverse. 

One of the positives of using ETFs to invest is that you don’t need to do as much research or place as many trades, compared to when you’re choosing individual stocks and funds. Once you’ve invested in a thematic ETF, the fund manager will passively manage which companies the fund invests in, ensuring those companies align with the chosen theme. This typically saves you time and commission costs, as you only need to research the thematic ETF and place a single trade. The fund manager will only passively manage the ETF, which is why their costs are typically lower than actively managed funds.

What is a thematic fund?

Thematic funds also invest in companies that match your chosen theme. The main difference of a thematic fund to a thematic ETF is how they are managed by the fund manager. 

While an ETF is passively managed, a fund will usually be actively managed. The fund manager monitors the performance of the underlying investments more closely and will respond more swiftly to market movements. While more input from the fund manager can be great if your chosen theme has quite volatile investments, actively managed funds often have higher costs than ETFs.

Are there risks to thematic investing?

There is always investment risk to think about, no matter how you choose to invest and thematic investing is no different. Even with all the research in the world, we can’t know for certain what the future holds. By choosing investments around a theme, there is a risk that your chosen theme doesn’t take off or trend, and you may not see the returns you might hope for.

Importantly, thematic investing doesn’t focus on how individual companies have performed in the past. While an overall theme could see massive growth, individual companies in that space could perform badly, and if any of those companies are part of your thematic fund or ETF, you might not see any investment returns. But this works both ways; a theme could see lacklustre growth overall but could have some stand out companies that deliver above expectations and provide great returns for investors.

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Please remember, investment value can go up or down and you could get back less than you invest. The value of international investments may be affected by currency fluctuations which might reduce their value in sterling.