Thematic exchange-traded fund (ETF) assets have increased an average of 45% per year for the last three years. According to a FactSet/Forbes Insights poll, investors reported holding 28% of their portfolios in thematic instruments or strategies, with that share expected to grow to 35% in the 18 months following the March 2021 survey.¹

The most popular way to express a thematic strategy is through ETFs, with 80% of survey respondents indicating ETFs are their top choice when investing in a theme.²

What is Thematic Investing?

Unlike traditional investment strategies, which focus on region (e.g., the U.S.), style (e.g., value) and capitalization (e.g., large), the focus of thematic strategies is on investing in long-term trends where investors see the potential for long-term capital appreciation. These themes may be economic (e.g., resource scarcity), technological (e.g., smart cities) or social (e.g., ESG) in nature.

According to ETF.com, there are 292 thematic-oriented ETFs traded on U.S. markets, with over $115 billion in assets under management. Illustrative of the wide range of available options, the five top asset gatherers over the last 30 days (as of May 13, 2022) were ETFs investing in³:

• An inverse alternative harvest strategy
• India internet and ecommerce stocks
• cannabis companies
• An innovation strategy
• An MSCI ACWI climate Paris Aligned index fund

Why Thematic Investing?

Many investors are attracted to it because it allows them to invest in strongly-held convictions about the future (e.g., artificial intelligence) or according to their values (e.g., decarbonization).

Thematic investing gives investors a purer play on mega-trends than generally available with traditional portfolios by offering an unconstrained approach that is not limited to size of company or its geographic location.

Finally, it may provide the potential for superior long-term performance compared to less focused portfolios.

What are the Risks?

Thematic investing requires the investor to be right on three key elements: picking the right theme, selecting the right fund to gain exposure to that theme and getting the timing right.

Reflecting this difficulty, a recent study by Morningstar showed that over a 10-year period, more than 40% of global thematic funds did not survive, while fewer than 10% of funds outperformed a broader benchmark.⁴

There is no question that economic technological, and social changes in the next 10 years may potentially provide compelling investment opportunities, but investors should tread carefully, perform the proper research and work with a financial advisor to craft a thematic strategy that works with his or her long-term financial goals.

Sources:

1. https://insight.factset.com/thematic-investing-catches-fire#:~:text=While%20the%20concept%20of%20thematic,an%20average%20of%2045%25%20annually.
2. https://insight.factset.com/thematic-investing-catches-fire#:~:text=While%20the%20concept%20of%20thematic,an%20average%20of%2045%25%20annually.
3. https://www.etf.com/channels/theme-investing
4. https://www.morningstar.co.uk/uk/news/212306/thematic-investing-a-cautionary-tale.aspx

Please reference disclosures: https://blog.americanportfolios.com/disclosures/