International Trade

  March 27th, 2025|Written by
Liz Connelly

The growing popularity of thematic investing has left many investors unsure about which path to take. Are you up to date with the latest sector trends, ready to bet on a changing future, or do you prefer the stability of tried-and-true methods? Thematic investing is praised for generating returns by focusing on long-term growth sectors like technology and environmental trends, appealing to those who want investments aligned with personal beliefs. In contrast, traditional strategies prioritize fundamentals such as company performance and consumer behavior. Choosing the right strategy depends on your goals and risk tolerance, whether seeking dynamic growth or stability.

Read also: The Growth of Global Investment: Digital Nomads and a New Generation of Investors

What is Thematic Investing?

Thematic investing focuses on long-term changes rather than short-term factors, seeking growth through exposure to themes like sustainability, technology, and societal change.

What are Thematic Funds and Thematic Strategies?

Investors seek new ways to gain exposure to trends, and thematic funds offer a unique alternative, focusing on world-shaping themes. For example, a clean energy fund capitalizes on the global move towards sustainability. Thematic funds differ from traditional ones, which may be based on general energy companies, applying a narrower focus on companies innovating in renewable technologies. This includes potential growth industries like artificial intelligence and urbanization.

Change Drivers and Growth Opportunities

Thematic investments are anchored in major mega-trends shaping industries. Climate change and the transition to alternative energy spur innovations in energy efficiency. Technological developments like automation and AI drive sector evolution, making investments in the future and tech-driven societies. These drivers offer growth opportunities that can meaningfully impact markets and provide attractive returns.

Thematic investing and the rise of ESG.

Environmental, social, and governance (ESG) factors are growing in importance within thematic investing, ensuring investments are sustainable and ethical. ESG offers insight into long-term risks and opportunities often missed by traditional criteria, positioning investors to capitalize on sustainable growth and innovation.

A Comparison of Investment Strategies

Recognizing the differences between thematic and traditional investing helps make informed decisions, with five strategies based on holdings, risk, and diversification for portfolio enhancement.

The Inherent Core Versus Non-Core Holdings Distinction

Thematic investments often focus on non-core holdings. Those may include companies that could stand to benefit from trends less entrenched — such as blockchain or renewable energy. Meanwhile traditional strategies tend to overweight core holdings, which favor more established companies with proven results.

This differentiation is critical to properly aligning investment goals with what one should expect in terms of returns and tolerance for risk. Thematic investing tends to be based on non-core holdings, leading to exposure to innovative sectors, though it requires a discerning eye on market evolution and relevance continuation.

Volatility vs. Concentration Risk

Thematic investments are more volatile, focused on specific themes, creating concentration risk tied to particular trends. As market sentiment shifts, this leads to asset value fluctuations. Traditional approaches provide some protection by investing in a variety of sectors, reducing large fluctuations and offering less downside risk, while providing more stability, if not as aggressive performance. This balance allows you to customize risk exposure.

Diversification Benefits

Thematic investing creates diversification opportunities through themes like artificial intelligence and sustainability, exposing investors to emerging growth fields. Traditional strategies focus on stability, diversifying across industries, and offering a safer route for lasting growth.

Thematic Funds: Active vs. Passive

Within thematic investing, you can have active or passive fund types. Active funds amplify returns through expert insights but often involve higher fees and require trusting the manager’s judgment. Passive funds track indices reflecting a theme, providing a low-cost way to gain exposure without active management. 

Offering thematic ETF investment solutions, passive funds give investors exposure to emerging trends at a lower cost compared to active funds. While they track the market’s performance, they don’t allow active adjustments. Which option you choose depends on your goals and comfort with fee structures and returns.

The Global Investment Landscape and Thematic Investing

Thematic strategies can have longer-term impacts, positioning you to benefit not from near-term volatility but from global trends as they manifest. Thematic investing is framed by long-term structural changes and monetary policies.

Evaluating Worldwide Trends and Structural Transformations

Thematic investing focuses on trends shaping the future economy, including technological, demographic, and behavioral changes. Investment managers examine these patterns and how they mold market dynamics, enabling funds to pursue opportunities traditional strategies may miss.

Balance between Monetary policy and geopolitics

Thematic strategies are impacted by monetary policy and geopolitical events. Rates, inflation, and government policies drive how thematic investments perform. Geopolitical factors, such as trade disputes, may also affect these strategies. Asset managers must navigate these factors to match assets with macro-economic conditions.

How Thematic Funds Are Managed

Global thematic funds require a unique management style. Themes are chosen, and asset classes aligned with those themes make up the portfolio. Managers continually adjust to new information and sector changes. For example, ETFs help avoid being stuck in outdated trends. Such approaches require thought and skill, balancing thematic objectives with economic returns.

Frequently Asked Questions

If exploring thematic investing vs. traditional strategies, it’s important to understand their differences and benefits. This section addresses frequent inquiries to help you make informed financial decisions.

What is thematic investment, and how is it different from traditional investment approaches?

Thematic investing focuses on particular trends or themes, such as technological innovations or demographic changes. Alternative strategies, by comparison, tend to be more focused on asset classes or industry sectors. Thematic investing also lets investors connect their holdings to personal values and future expectations.

What are the Pros and Cons of investing in thematic funds?

Advantages include staying ahead of rising trends and investing aligned with personal principles. There is a risk of higher volatility, and predicted trends may not occur. Assessing each theme is essential.

Who would be a good candidate for thematic investments in their portfolio?

Thematic investments may appeal to investors who are passionate about certain trends and who are comfortable with the possibility that their investments could fluctuate in value. Investors who are keen to diversify judiciously beyond familiar sectoral frontiers, too, can emerge as winners if they add thematic funds in their portfolio. That said, it is vital — or at least valuable — to be partly familiar with the themes you’re investing in.

How do thematic investing and impact investing typically perform?

Market themes are different from thematic investing which is a broader class of trends, and impact investing which is focused on social and environmental impact. Returns depend on execution and market behavior, but theme-driven investing is not necessarily positive in society.

What are some popular themes in thematic investing?

These could be sustainability, artificial intelligence, renewable energy and aging population. These topics also signal emerging global trends and changing social priorities that are creating opportunities for investors with an eye toward long-term and well-rounded themes.

What should investors think about when looking to balance a portfolio with thematic and traditional investment strategies?

Combining thematic and traditional approaches provides trend exposure with stability. Consider your risk tolerance and investment goals for a balanced portfolio that meets both short- and long-term needs.

In conclusion

The choice between thematic investing and traditional strategies depends largely on an investor’s goals, risk tolerance, and outlook on future trends. Thematic investing offers the potential for high returns by focusing on long-term global trends, while traditional approaches emphasize stability and fundamental analysis. Both strategies can play a valuable role in diversifying a portfolio, and understanding their differences allows investors to make informed decisions based on their unique financial objectives.