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Is thematic investing more susceptible to market movements?

By
Tom Kruse
June 14, 2018
10 min read

We all know we should invest to secure a better financial future for both ourselves and our families. But with terms like index funds, price-to-earnings ratio, and dollar cost averaging, investing becomes a daunting prospect for the average investor. The overwhelming nature of the stock market makes it difficult to even begin, which begs the question, what should I invest in?

In the past, studious investors would conduct in-depth research to determine which stocks will perform well. Less savvy investors often turned to mutual funds and index funds (commonly known as relative investing), allowing professional fund managers to handle their money. But recently, a friendlier approach to investing has surfaced – that approach is called thematic investing.

What is thematic investing?

Thematic investing operates similarly to mutual funds or index funds, in that it creates a portfolio made up of many different stocks. This diversification helps limit risk, while providing the investor with returns. But thematic investing differs in its approach to choosing stocks. Thematic investing involves selecting companies related to a specific macroeconomic issue/theme. If we’re talking impact (and we usually are), some themes could include Green Technology, Clean Water, or Disease Eradication.

The portfolio companies are also selected for their high growth potential and long-term sustainability; both of which could mean good news for your financial future. Moreover, thematic investments encompass impact investing, which selects themes based on altruistic intent. According to McKinsey, this type of socially responsible investing has grown 25% over the past two years to $23 trillion; and is expected to increase to $53 trillion by 2025. Millennials want to make more meaningful investments than traditional funds, and thematic impact investing provides that avenue.

Why is thematic investing more moveable?

Thematic investing offers many perks to investors. It allows you to customize your investments and focus on themes important to you. Compare this to mutual funds where the managers set your percentages, providing no access to customizability. Additionally, thematic investing exudes transparency: What you see is what you get.

Since thematic investing follows trends, each theme is strongly influenced by industry movements and outlooks. This potential for large swings makes thematic investing more movable than typical funds, which spread their investments across many different sectors and industries.

Even though themes stick to specific industries, thematic investing takes advantage of strong economic swings when well-executed. Thematic portfolios find growth-oriented themes that will remain for the long haul.

For example, the UN estimates that by the year 2030, 47% of the world’s population will live in areas of high water stress. Thus, organizations who work towards expanding and improving the global water supply will make good investments towards our future. By mixing this Clean Water theme with a diverse portfolio of long-term themes, thematic investors can experience high returns while limiting their risk and positively impacting society.

How are the themes selected?

While thematic investing allows you to invest with sentiment, you might wonder how these themes come to life. Luckily, thematic investing operates logically by following a strict decision-making process:

Identify trends – First, investors must identify trends that have long-term potential. For example, based on the rapid rate of fossil fuel depletion, finding alternative energy methods certainly holds long-term impact.

Turn the trends into themes – Investors must then use those trends to develop investable themes. Following the alternative energy example, we could select the general theme of Renewable Energy.

Develop a thesis – Investors must develop a thesis based on hard facts. By studying companies in the renewable energy sector, using formulas, and identifying trends, we can logically determine which organizations have the highest long-term growth potential.

Create your portfolio – Finally, investors must build the portfolio around the theme. Using Step 3 to find the best companies in renewable energy, we can ultimately generate a portfolio that spreads risk out among the promising organizations.

So how do I get started?

The decision-making framework can still overwhelm many investors. Which is why companies like Swell make those difficult decisions for you. They rigorously adhere to that process by selecting highly-researched, growth-oriented, stable companies with BB and above MSCI ESG scores. All you have to do is determine which themes best match your values, and invest in your future while knowing it supports good companies. Click here to learn more and begin investing today.

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