Thematic Investing: What Is It, and How Should Investors Think About It?
Thematic investing is a way to invest according to beliefs and values, focused on long-term ideas and trends.
Investing Ideas
Thematic Investing: What Is It, and
How Should Investors Think About It?
KEY TAKEAWAYS
•
Thematic investing allows investors to pursue market exposure to specific ideas
or values.
•
Fidelity Investments® has identified five different types of thematic investing, each
with a different overall approach.
•
Within each type, there may be different strategies for reflecting the theme,
including different approaches to selecting investments.
•
Thematic solutions may provide focused exposure to a theme plus the benefits of
professional research and management.
Anthony Ross
Vice President,
Investment Product
Jordan Alexiev, CFA
Portfolio Manager,
Global Institutional Solutions
Sarah Pulsifer, CFA
Senior Vice President,
Investment Product
Charlie Hebard, CFA
Managing Director of Research
Camille Carlstrom
Managing Director of Research
Introduction
“Thematic investing” refers to strategies through which investors can invest in long-
term ideas and trends, allowing them to capture potential opportunities created by
economic, technological, and social changes. Approaches based on themes may help
investors adapt their portfolios to include investments that align with their focused
interests or expectations.
More traditional investing approaches tend to limit their investment universe by
screening stocks against a given characteristic (such as region, market cap, style, or
economic sector) and focusing on a smaller subset of those stocks (such as U.S. stocks,
small caps, growth stocks, or consumer discretionary). Instead, thematic investing
allows investors to express a view that may cut across market capitalization, sector
classification, and region. Although investors often approach thematic investing
through stocks, it can include other asset classes (such as bonds or real assets) as well.
Thematic investing has been increasing in popularity. Mutual funds and ETFs with
traditional exposures still hold the majority of assets, whether those approaches are
broad or more specific. However, interest in thematic investments has been growing
with many new thematic strategies becoming available in recent years.
1
There are several categories of thematic investing, which differ in both investor
objectives and the philosophies that help determine the underlying investments.
Thematic Investing: What Is It, and How Should Investors Think About It?
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2
This article will:
Introduce a framework for the five types of
thematic investing as identified by Fidelity.
Describe some of the characteristics of each
type, to help investors think about which kinds of
thematic investments may be more suitable.
The five types of thematic investing
Through internal research, and analysis of investment
strategies and prevalent themes currently available,
Fidelity’s Asset Management group has identified
several different approaches that help define the world
of thematic solutions broadly available to investors.
To help investors think about their preferences, we have
grouped thematic investing into five different categories:
•
Disruption
•
Megatrends
•
Sustainable
•
Differentiated Insights
•
Outcome-Oriented
Disruption
The world changes fast, and many successful
companies today may be replaced 10 years from now
by companies that don’t yet exist. Disruption funds
EXHIBIT 1: Disruptive innovation can quickly upend existing industry dynamics, shifting flows of revenue to new paths.
Approximate Days to 1 Million Users
Sources: https://indianexpress.com/article/technology/artificial-intelligence/chatgpt-hit-1-million-users-5-days-vs-netflix-facebook-instagram-spotify-
mark-8394119/, and https://www.nytimes.com/2023/07/05/technology/threads-app-meta-twitter-killer.html, accessed August 9, 2023.
1
2
focus on understanding long-term shifts in business
economics, as the market evolves in response to
advances in technology, emerging industries, and
changing consumer preferences.
By investing in these expected shifts, investors in
disruption may benefit from opportunities that arise
when the market underestimates the pace of change.
Indeed, the market may especially underestimate how
quickly technology can cause rapid shifts in “business
as usual.”
An illustration of this dynamic: On November 30, 2022,
the OpenAI start-up publicly released ChatGPT 3.5,
an artificial intelligence chatbot that could produce
grammatically accurate and detailed responses to any
prompt entered by a user. Within five days, the new
application had 1 million users
2
; by January, 2023,
it had over 100 million, and OpenAI, its creator, was
valued at $29 billion.
3
Chat GPT was lauded for reaching 100 million users in
a few months. In July 2023 that record was smashed
by the Threads app, which crossed that threshold
in five days.
4
The rapid rise of Threads, a new social
media texting service created by Meta that rivals X
(formerly Twitter), highlights another important aspect
of investing in disruption: It’s not always the upstart
that achieves industry-upending breakthroughs.
Well-timed pivots by existing firms can at times unlock
0
200,000
400,000
600,000
800,000
1,000,000
0
100
200
300
400
500
600
700
800
900
1000
1100
1200
Users
Days
Threads, 1 hour
ChatGPT, 5 days
Instagram (iOS), 60 days
Spotify, 150 days
Facebook, 300 days
Netflix, 1260 days
Thematic Investing: What Is It, and How Should Investors Think About It?
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3
new frontiers of growth. Apple’s switch in focus
from computers to consumer electronics in the mid-
2000s with the launch of the iPod and iPhone helped
transform it from a niche player in the computer
industry to the world’s first $1 trillion company by
market cap by 2018.
5
A disruption solution may focus on long-term
trends where we could be still in the early stages of
development. Some examples may include:
•
Cloud computing
•
Autonomous driving
•
Artificial intelligence
Key point:
Investing in a disruption theme may
mean investing in companies that are directly
driving a long-term change. It may also mean
looking more widely at all sorts of companies
potentially affected by a disruptive shift.
An illustration of a megatrend could be the gradual
decrease in agricultural land per person, which is down
nearly 50% since 1961. As this trend continues, new
farming and alternative food-production techniques
may become more necessary to support the needs of a
growing global population (Exhibit 2).
EXHIBIT 2: World population growth and less land
dedicated to farming may support a megatrend focus on
food production and efficiency.
Arable Land Use per Person, 1961–2020
The per capita allocation of land to arable agriculture, measured as the area
under arable cultivation divided by the national or regional population.
Source: https://ourworldindata.org/land-use, accessed July 12, 2023.
Hectares per person
North America
European Union
Brazil
World
India
China
0
0.2
0.4
0.6
0.8
1
1.2
1961
1970
1979
1988
1997
2006
2015
Megatrends
Some significant changes happen gradually, over the
course of decades. Many observers can see these
changes coming but might not realize how the world will
be transformed in response. Megatrend funds focus on
understanding long-term growth in profits, as aided by
forces such as demographics and/or resource scarcity.
By identifying these gradually moving trends, megatrend
investors may benefit from anticipating the effects. Some
examples of potential megatrends that may reshape the
markets include:
•
Aging populations causing shifting consumption
patterns
•
A growing population requiring more efficient use of
resources
Key point:
Investing in megatrends may include
identifying trends that could lead to major
transformations over time, and searching for the
companies that seem most likely to benefit.
Thematic Investing: What Is It, and How Should Investors Think About It?
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Sustainable Investing
At Fidelity, sustainable investing is a discipline that
incorporates financially material environmental, social,
and (corporate) governance considerations in the
investment research and decision-making process.
For investors seeking exposure to companies with
sustainable business practices, such as strong human
capital management and sound corporate governance,
sustainable investing may provide a way to invest in a
strategy that reflects a disciplined evaluation of these
considerations.
Sustainable investing isn’t new, but it has been
evolving over the years and now includes a wide range
of different approaches, which Fidelity would separate
into three major groups (Exhibit 3). While all three
types can support investors’ sustainability preferences,
we believe thematic sustainable funds can help
investors align their objectives to longer-term trends.
Thematic sustainable investment approaches can
employ active research and analysis to determine
which companies can employ active research and
analysis to determine which companies have strong
sustainability characteristics alongside long-term
market performance. Some examples of themes within
this category include:
Source: Fidelity Investments.
While environmental, social, and corporate governance (ESG) factors are made available to all investment teams, ESG assessments represent one of many pieces of
research available to the portfolio managers, and the degree to which it impacts a strategy’s holdings may vary strategy by strategy based on the portfolio manager’s
discretion. Investing based on ESG factors may cause a strategy to forgo certain investment opportunities available to strategies that do not use such criteria. Because
of the subjective nature of sustainable investing, there can be no guarantee that ESG criteria used by Fidelity will reflect the beliefs or values of any particular client.
EXHIBIT 3: Fidelity has identified multiple ways to invest sustainably, each with a different approach to selecting investments.
Negative/Exclusionary Screening
ESG Integration
Sustainable Thematic Investing
Avoids investments in sectors, industries,
or companies deemed unacceptable or
controversial, based on global standards or
client preferences and values
The inclusion of ESG considerations within
financial analysis and investment decisions;
considers how ESG issues impact a security’s
risk and return profile
Investing in companies that align to a
sustainability-related theme such as climate or
social issues
• Excluding tobacco companies
• Excluding gambling companies
• Guided by financial materiality and
relevance at the sector and industry level
• Alternative/clean energy
• Gender and diversity
•
Environmental themes, such as investing in
companies that are responding to consumer demand
for sustainable practices or are focused on delivering
innovative solutions such as alternative energy
•
Social themes, such as investing in companies
that identify and target business opportunities in
underserved areas, or companies committed to a
diverse and inclusive workplace or providing safe
working conditions
•
Governance themes, such as investing in companies
committed to incorporating best-in-class governance
through aspects such as board composition and
oversight, management incentives, allocation of
capital, and shareholder-friendly policies
Key point:
Many different approaches are
included under the umbrella of sustainable
investing, so investors may want to consider
their most important goals to help them decide
which type or types of sustainable investing
themes they may want to focus on.
Thematic Investing: What Is It, and How Should Investors Think About It?
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5
Differentiated Insights
Some thematic investing strategies will be built around
unique insights that don’t fit into the categories listed
above and are different from a traditional investment
process using something like market capitalization or
style as a basis. These investment themes may reflect
ideas about which types of companies make attractive
investments, backed by empirical evidence and
ongoing research.
By investing in a differentiated insight solution,
investors can gain exposure to companies sharing
some characteristics that may give them an advantage
over the long term. Some examples of a differentiated
insight solution include:
•
Focusing on companies still led by their founders
•
Focusing on stocks of companies using higher than
average leverage (outstanding debt)
One illustration of how a differentiated insight
may shape a thematic solution comes from our
observation that some investors believe that founder-
led companies, on average, have an advantage in the
marketplace thanks to the passionate involvement of
the founder. A fund that focuses on researching and
investing in what we consider high-quality founder-led
companies would be one example of a differentiated
insight strategy.
As shown in Exhibit 4, there is a substantial number of
founder-led companies ranging across most sectors
of the U.S. market, suggesting that a solution focusing
on that theme may find a wide variety of companies to
consider.
EXHIBIT 4: With nearly 700 founder-led companies across
many sectors, an investor interested in this theme could
hold a well-rounded portfolio of U.S. stocks.
Founder-Led vs. Total Number of Companies per Sector in
the Russell 3000 Index
Founder-Led: Companies for which one or more founders are on the board of
directors or on the management team. Source: FactSet, Fidelity Investments
analysis, as of July 12, 2023.
3
45
25
13
14
51
85
145
61
170
87
68
118
122
130
132
174
356
368
429
490
493
Utilities
Comm. Svcs.
Cons. Staples
Materials
Energy
Real Estate
Cons. Disc.
Info. Tech.
Industrials
Health Care
Financials
All 3000 Companies
Founder-Led
Key point:
In choosing investments that start
from a common differentiated insight, these
thematic solutions can give investors exposure
to targeted ideas and investment selections.
Thematic Investing: What Is It, and How Should Investors Think About It?
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6
EXHIBIT 5: Historical data shows that low and stable
inflation has not always been constant, inspiring some
investors to seek out historically inflation-resistant assets.
U.S. Inflation, 1950–2022
U.S. inflation: Core Consumer Price Index (CPI)—All Items. Chart shows
12-month changes in prices. Source: FactSet, Bureau of Labor Statistics,
Fidelity Investments as of July 12, 2023.
Past performance is no guarantee of future results.
Outcome-Oriented
Fidelity defines outcome-oriented thematic approaches
as investment strategies designed to pursue a specific
outcome in an overall portfolio, in connection with a
particular economic or market theme. For example:
An investor wants to be invested in U.S. stocks,
but is particularly worried about the uncertainty of
inflation over time (Exhibit 5). An outcome-oriented
thematic fund could provide additional exposure to
market segments and companies that have historically
performed well during times of high or rising inflation.
Other examples of an outcome-oriented strategy might
be funds designed to provide lower volatility of returns
or to reduce the impact of market downside, by investing
in stocks that have historically been less volatile or
performed better during market declines, respectively.*
For investors in an outcome-oriented strategy, seeking
that outcome over the long term may be a higher priority
than short-term returns from that strategy.
* Past performance is no guarantee of future results.
Why consider a thematic investing solution?
Thematic investing is a way of expressing a view on
the market that is different from region, sector, style,
or market capitalization exposure. Investors can use
thematic investments to increase their portfolio’s
exposure to selected trends, values, or insights.
To help investors achieve that end, thematic investing
may offer more targeted ways to add specific exposures
to a theme than other types of funds. Indeed, some
investors who buy individual stocks are, at least in
part, thematic investors. They may buy securities from
companies they think will disrupt the current competition,
or invest in companies with values they agree with. Or
they may invest with a certain portfolio outcome in mind:
for example, buying stocks or market segments to help
support their portfolio during times of high inflation.
For investors with these types of convictions, a
thematic investing solution may be a helpful portfolio
building block for several reasons.
•
Extensive amounts of research are needed to identify
and monitor investments that best represent a
theme. Buying a managed thematic strategy may
allow a professional research team and portfolio
manager to do that work.
•
Diversification is another advantage. For example,
an individual investor may choose a small number
of stocks related to a theme. But putting too
much of an investment in any single stock brings
concentration risk. Buying a fund based on a
thematic strategy can help spread the stock-specific
risk while keeping the thematic focus.**
•
Not all companies will benefit equally from their
connection to a particular theme. Having a fund
management company evaluate investments
through fundamental research may be a benefit.
** Diversification does not ensure a profit or guarantee against a loss.
CPI—All Items
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
1950
1962
1974
1986
1998
2010
2022
Key point:
Outcome-oriented thematic funds
are designed to fulfill a specific objective within
a portfolio, which may help an investor prepare
for long-term market changes and trends.
Thematic Investing: What Is It, and How Should Investors Think About It?
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7
Understanding different thematic approaches
Each thematic category may have a range of
investment approaches that are worth considering.
Because thematic investing expresses targeted ways
of thinking about investing, different providers may
use similar names for very different approaches. For
example, two funds called “megatrend” or “clean
energy” might have very different ways of applying
the theme. Investors should do their own research
to make sure the approach of a thematic solution
provides the types of investments they are seeking.
How is the strategy managed?
By their nature, thematic solutions involve some form
of active decision-making on how to turn the concept
into a strategy for finding specific investments. This
analysis and judgment can be enacted either through
an actively managed solution, or through a rule-based
approach. Regardless of the management style,
we believe investors may benefit from considering
solutions managed by firms with deep research
resources to help define a theme and maintain the
intended thematic focus over time.
Actively managed solutions include those in which a
portfolio manager selects securities through research.
In an actively managed thematic strategy, the portfolio
manager selects from among companies that offer
exposure to that theme. A megatrend fund, for example,
might be designed to offer exposure to a chosen
long-term trend, with the portfolio manager selecting
companies expected to benefit from that trend.
Alternatively, a thematic solution may be “rule-based,”
where securities are selected according to pre-set
rules. An outcome-oriented fund, for example, might
be created with a rule in mind such as “investing
in companies that have done better in inflationary
environments in the past.” Or a sustainable investing
SMA may select companies according to pre-set rules
to determine which companies are environmental
leaders. But it is important to remember that setting
these rules requires active decision-making on the part
of the manager.
How broad is the thematic exposure?
Another consideration for investors is the role thematic
investing can play in their portfolio, and whether a
broad or concentrated solution is preferable. A broad
fund that allows for a widely diversified range of
holdings may make a solution appropriate for a larger
portion of a portfolio, because the approach may
more closely resemble broad-market investments in
their return and risk characteristics. Many sustainable
investing funds, for example, are designed to resemble
the exposure of a broad market index, but favor
companies with strong sustainability profiles.
A more narrowly defined theme with concentrated
exposures may be more appropriate as a targeted
building block within a portfolio. For example, a
disruption fund focused on cloud computing and other
emerging digital systems may invest heavily in leading-
edge companies developing new technologies. This
type of solution may represent a small portion of
an investor’s desired exposure to stocks, with other
investments included to fill out the remaining equity
exposure in their portfolio.
Outcome-oriented solutions may have a highly specific
approach that could be either broad or targeted. They
may be designed to be a large portion of the portfolio
or a small portion of the wider asset mix.
In all cases, investors may want to examine the
underlying strategies of the thematic solutions
under consideration, to understand how they may
fit into their asset mix and overall investment goals.
Additionally, investors may need to evaluate how
closely the investments included in a thematic solution
match the desired thematic exposure.
Implications for investors
Many investors want their investments to align with
their views on how the world is changing, to take
advantage of the risks and opportunities they see
in the market, or their values for making the world a
better place. Thematic investing gives them a way
to express those views, assisted by the research and
professional management of vehicles such as a mutual
fund or an ETF. The five thematic categories defined
by Fidelity can help investors understand their options
and define their interests as they research available
funds. Ultimately, thematic funds are about giving
investors new ways to personalize their portfolios by
reflecting their ideas and values.
Thematic Investing: What Is It, and How Should Investors Think About It?
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8
Endnotes
1
Morningstar as of Dec. 31, 2018. Fidelity analysis based on classifying funds into the general categories described in this article.
2
https://www.reuters.com/technology/chatgpt-sets-record-fastest-growing-user-base-analyst-note-2023-02-01/
3
https://www.wsj.com/articles/chatgpt-creator-openai-is-in-talks-for-tender-offer-that-would-value-it-at-29-billion-11672949279
4
https://www.reuters.com/technology/metas-twitter-rival-threads-hits-100-mln-users-record-five-days-2023-07-10/
5
https://www.bbc.com/news/business-45050213
Sectors are defined as follows:
Communication services:
companies that facilitate communication or provide access to entertainment content and other
information through various types of media. •
Consumer discretionary:
companies that manufacture goods or provide services that people want but don’t
necessarily need, such as high-definition televisions, new cars, and family vacations; businesses tend to be the most sensitive to economic cycles. •
Consumer
staples:
companies that provide goods and services that people use on a daily basis, like food, clothing, and other personal products; businesses tend to be
less sensitive to economic cycles. •
Energy:
companies whose businesses are dominated by either of the following activities: the construction or provision of oil
rigs, drilling equipment, and other energy-related services and equipment, including seismic data collection; or the exploration, production, marketing, refining,
and/or transportation of oil and gas products, coal, and consumable fuels. •
Financials:
companies involved in activities such as banking, consumer finance,
investment banking and brokerage, asset management, and insurance and investments. •
Health care:
companies in two main industry groups: health care
equipment suppliers, manufacturers, and providers of health care services; and companies involved in research, development, production, and marketing
of pharmaceuticals and biotechnology products. •
Industrials:
companies whose businesses manufacture and distribute capital goods, provide commercial
services and supplies, or provide transportation services. •
Information technology:
companies in technology software and services and technology hardware
and equipment. •
Materials:
companies that are engaged in a wide range of commodity-related manufacturing. •
Real estate:
companies in two main industry
groups—real estate investment trusts (REITs), and real estate management and development companies. •
Utilities:
companies considered to be electric, gas,
or water utilities, or companies that operate as independent producers and/or distributors of power.
Index definitions:
Russell 3000
®
Index is constructed to provide a comprehensive, unbiased, and stable barometer of the broad market and is completely
reconstituted annually to ensure that new and growing equities are reflected.
Information provided in, and presentation of, this document are
for informational and educational purposes only and are not a
recommendation to take any particular action, or any action at all, nor an
offer or solicitation to buy or sell any securities or services presented. It is
not investment advice. Fidelity does not provide legal or tax advice.
Before making any investment decisions, you should consult with your own
professional advisers and take into account all of the particular facts and
circumstances of your individual situation. Fidelity and its representatives
may have a conflict of interest in the products or services mentioned in
these materials because they have a financial interest in them, and receive
compensation, directly or indirectly, in connection with the management,
distribution, and/or servicing of these products or services, including Fidelity
funds, certain third-party funds and products, and certain investment
services.
Views expressed are as of August, 2023, based on the information available
at that time, and may change based on market and other conditions. Unless
otherwise noted, the opinions provided are those of the author and not
necessarily those of Fidelity Investments or its affiliates. Fidelity does not
assume any duty to update any of the information.
Investing involves risk, including risk of loss.
Because of their narrow focus, thematic and sector investments can be
more volatile than investments that diversify across many sectors and
companies.
Past performance is no guarantee of future results.
Diversification and asset allocation do not ensure a profit or guarantee
against loss.
Unlike mutual funds, ETF shares are bought and sold at market price,
which may be higher or lower than their NAV, and are not individually
redeemed from the fund.
ETFs are subject to market fluctuation, the risks of their underlying
investments, management fees, and other expenses.
All indices are unmanaged. You cannot invest directly in an index.
Stock markets, especially foreign markets, are volatile and can decline
significantly in response to adverse issuer, political, regulatory, market, or
economic developments.
Foreign securities are subject to interest rate, currency exchange rate,
economic, and political risks.
The Chartered Financial Analyst (CFA) designation is offered by the CFA
Institute. To obtain the CFA charter, candidates must pass three exams
demonstrating their competence, integrity, and extensive knowledge in
accounting, ethical and professional standards, economics, portfolio
management, and security analysis, and must also have at least 4,000 hours
of qualifying work experience completed in a minimum of 36 months
,
among
other requirements. CFA
®
is a trademark owned by CFA Institute.
Third-party marks are the property of their respective owners; all other
marks are the property of FMR LLC. The third parties referenced herein
are independent companies and are not affiliated with Fidelity Investments.
Listing them does not suggest a recommendation or endorsement by Fidelity
Investments
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®
provides investment products through Fidelity
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through National Financial Services LLC or Fidelity Brokerage Services LLC
Members NYSE, SIPC; and institutional advisory services through Fidelity
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© 2023 FMR LLC. All rights reserved.
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03
0823
Authors
Anthony Ross
Vice President, Investment Product
Anthony Ross is vice president in the Investment Product Group
at Fidelity Investments. In this role, Mr. Ross is responsible for
leading the business strategy, development, advocacy and product
management of Fidelity’s thematic and sector equity strategies, and
the development of the firm’s proprietary fixed income indices.
Jordan Alexiev, CFA
Portfolio Manager, Global Institutional Solutions
Jordan Alexiev is a portfolio manager in the Global Institutional
Solutions Group at Fidelity Investments. In this role, Mr. Alexiev
manages custom multi-asset class mandates for institutional investors
and financial intermediaries.
Sarah Pulsifer, CFA
Senior Vice President, Investment Product
Sarah Pulsifer is a vice president in the Investment Product Group
at Fidelity Investments. In this role, Ms. Pulsifer is responsible
for product management and product development for actively
managed US and International Equity investments as well as
Environmental, Social and Governance (ESG) products. Her prior
product coverage has included Target Allocation, Target Date and
Institutional Solutions.
Charlie Hebard, CFA
Managing Director of Research
Charlie Hebard is a managing director of research in the Equity
division at Fidelity Investments. In this role, Mr. Hebard manages the
Technology/Communications Services, Energy/Materials, and Private
Equity Investments teams. He also co-manages the Fidelity Enduring
Opportunities Fund, Fidelity Disruptive Automation ETF, Fidelity
Disruptive Communications ETF, Fidelity Disruptive Finance ETF,
Fidelity Disruptive Medicine ETF, Fidelity Disruptive Technology ETF,
and Fidelity Disruptors ETF.
Camille Carlstrom
Managing Director of Research
Camille Carlstrom is managing director of research and a portfolio
manager in the Equity Division at Fidelity Investments. In this role,
Ms. Carlstrom is responsible for the Industrials, Financials, and
REIT teams. Additionally, she co-manages the Fidelity Enduring
Opportunities Fund, Fidelity Disruptive Automation ETF, Fidelity
Disruptive Communications ETF, Fidelity Disruptive Finance ETF,
Fidelity Disruptive Medicine ETF, Fidelity Disruptive Technology
Fund, and Fidelity Disruptors ETF.
Fidelity Vice President Vic Tulli, CFA, provided editorial direction for
this article.
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