Thematic Investing: What Is It & How to Get Started?

Nasdaq Thematic Investing - Seminconductors & Cybersecurity

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If you’re a regular investor, you might have come across things like “thematic investing”, “thematic funds” or “thematic ETFs” on your favourite online brokerage or robo advisor. This, um, theme seems to be everywhere on investment platforms these days.

So what does it mean? Don’t worry, it’s not a technical term. Thematic investing is just an investing style where your decisions are guided by broad, long-term, global trends that may impact multiple industries or companies. Some examples are sustainability, robotics, and the post-pandemic world.

Still confused? Let’s use an analogy to explain thematic investing.

Imagine that investing is like going to a shopping mall. Many investors head straight to the Apple store (or other stores that sell only one big, famous brand). They invest because they’re familiar with the brand and believe the company can deliver value.

Some folks aren’t loyal to a particular brand and don’t want to make too many decisions. They’re happy to fill their shopping baskets with assorted brands; any brand will do. These investors head to the S&P 500 department store, which stocks the 500 most successful companies in the US stock market.

After thinking about it, however, you might head to a sustainability-themed boutique that stocks multiple brands sourced from all over the world and a whole range of products like clothes, household products, and food. That’s pretty much what thematic investing is like. (In this case, the “theme” is sustainability.) 


Why is thematic investing a “thing” now?

Thematic investing has always been around, but it wasn’t until COVID-19 hit that it shot to stardom.

On the surface, COVID-19 is a health pandemic. But its influence doesn’t stop there. It’s also caused massive changes in logistics, F&B, retail, real estate, travel, among other things. We used to group things in tidy little categories and industry sectors, but the pandemic blew everything apart and showed us how interconnected everything is.

The pandemic also showed investors the limits of traditional methods like stock-picking (the Apple shoppers) or generic index investing (the department store goers). If you’ve suffered losses from the pandemic or, now, the Russo-Ukrainian war, it’s now blatantly obvious that traditional investing methods leave one’s portfolio open to major disruption.

That’s why many are now turning to thematic investing as add-ons to our existing portfolios. It’s both a way to future-proof our portfolios and to support our convictions.


What themes should you be looking at?

As thematic investing is such a broad umbrella term, referring to a loose investment philosophy rather than a cut-and-dried method, it all boils down to your personal preference.

Many thematic investors buy into specific causes or technological shifts that we believe will change the world for the better, for example, clean energy or blockchain technology.

A portfolio along one of these themes may feature many companies scattered across sectors like finance, tech, and manufacturing. However, undergirding it all is the belief that all these companies will benefit from the structural changes that come with the widespread adoption of the trend.

However, such themes are very much for the long-term investor since it may take years or even decades for such structural changes to come to fruition.

For risk-averse investors or those who want to balance out the more idealistic components of their portfolios, there are also investment themes with more tangible prospects of sustainable growth.

Case study #1: Semiconductors

Semiconductor sounds a lot like sector investing, but this theme is informed by a wider trend: the evolution of technology.

We’re now experiencing major advances in blockchain (including crypto and NFTs), gaming, autonomous vehicles, artificial intelligence and cloud computing.

Notice how all these developments aren’t limited to a specific platform? It would be virtually impossible to invest in every single company, tech platform and device promising spectacular growth. But we can invest in the underlying substance of them all: semiconductors.

While some other investment themes merely promise future growth, semiconductors are already booming: according to a report on Nasdaq’s Global Semiconductor Index (GSOX), the industry has outperformed the S&P 500 by more than twice in recent years.

Case study #2: Cybersecurity

If our national obsession with scams hadn’t made it abundantly clear, cybersecurity is a huge issue today. This is caused in part by rapid digitalisation as a result of the pandemic. Some businesses and customers had been forced to go online before they were truly ready, and as a result, security gaps have been quickly exposed and taken advantage of.

Now that we’re moving towards a post-pandemic normal, businesses are likely to concern themselves with plugging these gaps, locking down proprietary data and safeguarding their customers.

A 2021 article on Nasdaq’s cybersecurity ETFs (NQCYBR and HXR) shows that the sector has already grown exponentially. Thus, cybersecurity is another theme that’s perfect for thematic investors with shorter investment horizons.


How to get started?

Getting started with thematic investing isn’t difficult. Most investment platforms offer thematic funds or ETFs and have made it easy for you to buy into them.

However, before you jump in, you should first ask yourself about your thematic investing goals and horizon. Are you investing in your ideals for the long run and don’t care that much about getting tangible returns anytime soon? Or are you looking for something with a strong investment case right now, as well as potentially explosive growth in the longer term?

Most investment companies publish their research and insights on what themes they believe will do well. You can also read about the latest thematic funds and indices and find out why they were created.

Each investment platform has its range of thematic investment products and you might realise that your desired investment (such as the Nasdaq cybersecurity and semiconductor funds described above) aren’t on the platform. Feel free to speak to your asset manager, investment broker or bank to request access to such funds.

Another method is to identify the ETFs you want, find out which stock market they’re available on, and buy them through a platform that offers that market. For example, Nasdaq’s ETFs are available on Nasdaq (obviously!) and you can invest via any broker that offers US market access.

Either way, you’ll want to do your due diligence as there are a lot of thematic funds out there. If you’re feeling overwhelmed, our advice is to stick to reputable financial institutions like Nasdaq, which build solid investment cases (as opposed to fluffy ones) and offers transparent and easy-to-understand reports. 

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