Thematic Investing: What and Why?
A market-disrupting investment method known as “thematic investing” is centred on international trends or themes. Many investors hoping to invest in the US think that future market returns could be above average for these ongoing themes (such as artificial intelligence or electric vehicles). The use of themes that may lead to the development of different technologies or structural changes within economies is what is sometimes referred to as “thematic investing” or “impact investing.” Thematic investing is in line with structural changes like those brought about by the digital economy and smart cities. Depending on your beliefs, it may also encompass sustainable investing through environmental, social, and corporate governance, food revolutions, clean energy, etc. Now, can Indians invest in the US stock market through thematic investing?
How Does Thematic Investing Work? And How to Get Started?
Thematic investing operates similarly to other types of investing, but it concentrates on a specific theme, such as robots or renewable energy. This is typically accomplished through themed investment funds, or ETFs focused on themes you anticipate will produce above-average long-term returns. Thematic investing is nonetheless also possible by purchasing a variety of individual shares. Here is how you can get started with thematic investment:
- Pick themes you want to focus on
It’s crucial to conduct your own investigation into global trends, exercise due diligence, and recognise the themes that have been operating by your trading or investment plan. Imagine, for instance, that you choose to invest in robots, fintech, and electric vehicles. While you might be tempted to pick the theme just because such industries have had a boom recently, it’d be wise first to conduct a study and track its market performance over time rather than accept things at face value.
- Decide how you want to invest.
When you decide to invest, you have several alternatives on where to begin your themed investing adventure. You can decide to invest in pre-made funds, exchange-traded funds, and investment trusts related to your selected theme. You must decide between passive and active funds while choosing a fund. When you invest in an active fund, you’re entrusting your funds to a fund manager who has knowledge of the best stocks, shares, and investment opportunities and can potentially outperform the market and provide significant returns. It is not necessary to use fund managers while investing in passive funds. As a result, you will invest in the US by investing in ETFs or a portfolio of shares and stocks that closely track the stock market’s overall performance and track market movements.
You might also buy individual shares related to your theme as an alternative. This implies that you would buy a specific thematic stock. Instead of investing in a collection of equities, as is the case with thematic ETFs, you may invest directly in one of the particular electric vehicle manufacturers, such as Tesla or NIO.
- Know the risks that come with the benefits of thematic investing
Invest in a cause that is important to you. You might even believe that this will be the market-beating theme. With just one click, you can quickly invest in the US by focusing on a theme (with an ETF). Potential development, though, needs to be balanced with robust technical and fundamental analysis and risk management. Excessive exposure to one particular sector or theme can lead to concentration risk. Therefore, if the triggers act against you, your portfolio performance may suffer significantly.
Sector Investing vs Thematic Investing
Although there are some essential distinctions, sector investing and thematic investing is sometimes conflated. Investment money is invested in particular economic sectors through sector investing. Energy, information technology, and healthcare are all popular industries. Thematic investing is unique because it uses broader technical advancements to increase output across numerous sectors. Robotics and sustainable energy are popular themes.
|Sector investing||Thematic investing|
|Particular segments of the economy||Span segments of the economy|
|Funds are typically more significant to encompass the industry||Funds tend to have a narrowed-down focus, with lesser companies|
|Influenced by trends in the industry||Driven by values, beliefs, disruption, and ideas|
Can Strategies Like ESG Investing Beat the Market?
ESG is the abbreviation for environmental, social, and governance. Investors use these non-financial aspects more frequently as part of their analytical process to spot important dangers and expansion prospects. There is a lot of uncertainty regarding what investors should anticipate due to the ESG investing industry’s exponential rise. There have been conflicting findings in academic research that have looked at the relationship between ESG variables and the operating performance of corporations and investment outcomes.
We can use a simple, simplified stock market with only two companies as a starting point to gain a greater grasp of the forces at play. The only significant difference between the two businesses is this: One business, Green Inc., exclusively uses energy produced by renewable resources, whereas the other, Brown Inc., exclusively uses energy produced by burning coal. Prices are roughly the same as before the awakening, thus, returns will also be approximately the same. The stock of Green Inc. would fare better than that of Brown Inc. during the ESG awakening. Less clear is the fact that the stock of Green Inc. would produce lesser returns than that of the stock of Brown Inc. in the post-awakening age. Therefore, it must be that more secondary post-awakening returns are anticipated. This is just a mathematical reality resulting from the fact that return is defined as a percentage of the asset’s purchase price. ESG investors are at ease with this new balance due to their willingness to accept lower financial returns in exchange for greater ESG ratings.
During the ESG awakening, there is a presumption that knowledge regarding ESG and competitive markets will be freely available. ESG advantages are factored into Green Inc.’s pricing if investors can do so. Therefore, they won’t affect future returns. Returns for Green Inc. will increase only if there are unanticipated changes to ESG variables or if perceptions of the financial consequences of ESG factors change for the better.
While the passive investors of Green Inc experienced reduced returns during the post-awakening period, an “ESG activist” may outperform the market by making an investment in Brown Inc. and turning it into a well-regarded ESG firm.
An individual sub-theme, theme, mega-theme, or category might be the focus of a thematic ETF. Here is a table that could be helpful while you make an investment in the US:
|Disruptive technology||Big Data||Cybersecurity|
|Edge/Cloud Computing||Remote Work|
|Electric Vehicles||Charging infrastructure, Lithium batteries|
|Connectivity||5G/Next Gen Networking|
|Internet of Things||IIoT, Smart cities/Smart devices|
|Emerging market internet|
|People and demographics||New consumer||Millennials and Gen Z|
|Emerging market consumers|
|Security and safety|
|Health||Healthcare innovation||Public health, Immunotherapy, Genomics, Telemedicine and digital health|
|Aging population||Senior economy, Senior care|
|Health and wellness||Organics, Obesity|
|Emerging markets healthcare|
|Physical environment||Climate change||CleanTech|
|Clean and renewable energy||Hydrogen, Wind, Solar|
|Resource scarcity||Water, Sustainable food, waste/recycling|
Benefitting From the Ongoing Themes with Stock Market Investment Apps like Stockal
Stockal, considered the best investment app in India, offers investors the option to invest in pre-built stacks of stocks and ETFs, which can be bought with just one click. Stockal offers curated pre-made portfolios organized around predetermined ideas or topics to address the “what to invest” problem. Renowned financial professionals created each stack on this stock market investment app to fit various investment methods, risk tolerances, and investment objectives. Take a look at the following to find out how Indians can invest in the US stock market:
- Electric Vehicle Portfolio: Companies active in electric vehicle (EV) technology, autonomous vehicles, batteries, EV components, and general clean technology companies make up the Electric Vehicles Stack. This Stack focuses exclusively on investing in EV companies with strong growth potential.
- US Tech Bluechip Portfolio: The US Tech Bluechip Stack on this stock market investment app makes investments in Tech Internet companies that are only focused on technology and have market-leading competitive advantages (MOATs) over their rivals.
- All Essentials: This stack makes investments in assets, including debt, REITs, commodities, and stocks, that are useful in both boom and bust periods of the economy. By doing this, it has the capacity to offer capital growth for the investor while maintaining returns throughout a variety of business cycles.
- Global X Equity Portfolio: In a diversified U.S. sector portfolio, the Global X Equity Sector and Themes Portfolio offer exposure to thematic equity. This portfolio’s concentration on thematic equity is its most distinctive characteristic. Depending on how favourable the environment would be for thematic equities in the short term, the amount of exposure to it will likely change.
- Stocklife Dividend Yield: The stack uses a combination of ETFs and dividend stocks to offer broad exposure to companies with higher dividend yields and reliable market returns. One who invests with Stocklife Asset Private Limited will access various income fields, including ETFs, stocks, and REITs. The stack aims to expose clients to a variety of dividend income markets.
- Omniscience AIoT: AIoT Stack is at the centre of disruptive technology infrastructure, including application cases for AI, IoT, Cloud, 5G, Big Data, Robotics, Analytics, and Cybersecurity (Autonomous Cars, Industry 4.0, Smart Wearables, Virtual Reality, etc). With its three divisions of Digital Work, Digital Life, and Digital Brain, AIoT is the only pure-play artificial intelligence investment opportunity that spans the whole spectrum.
To start investing in stacks on Stockal, one of the best investment app in India, you have to create an account; decide on the timeline, goals, and theme; and lastly, pick an appropriate stack based on your chosen theme.