Thematic Investing

Nov 21, 2016 | by Franck Cushner, CFP®

Traditional asset-allocation is often based upon relative valuation. Meaning, one would hold larger positions in firms after reviewing historical data and pricing against peers.  For example, you may be long Coca-Cola because it has a relatively cheap P/E ratio among beverages, Chevron because of its Book to Market being higher than other large-cap energy, Ford and not General Motors because of Dividend Payouts, AT&T against Verizon for Reinvestment Rate, or any other trade-off between similar assets influenced by a core belief that the selected firm would outperform peers. Beyond relative valuation, a different way to construct a portfolio is thematic investing. Thematic investment tends towards a more exogenous growth in value – focusing on forward looking expectations of change in sectors, nations, and disruptive technologies from a global perspective.  A general way to think about the two, traditional investing is biased towards fundamental microeconomics while thematic investing biased towards fundamental macroeconomics.


Let’s say you had a strong belief that clean energy will be a long-term high-growth sector after studying rising local sustainability standards, UN protocol developments, and political risk in fossil-fuel producing countries. Additionally, you believe everything will become automated and cloud-based because you’re passionate about developments in artificial intelligence and computer networks. Relative valuation may not be suitable in this instance, as young firms on the forefront of clean energy and emerging tech potentially do not have enough history (either as a sector or individual) to backtest strategies. Therefore, it takes a bit more of guts, creativity, and alternative-data analysis to construct the basket of assets which best captures your outlook. There isn’t a direct guide to weigh your assets in this scenario. It can be a very time-consuming process; although, may be worth it, if you have the time and intellectual curiosity. However, if the legwork is too consuming, there are a variety of ETFs (and asset managers) which have risen to fit the thematic investing gap.

How could I do this?

Treating our two prior beliefs as one basket, one may decide to spread the investment across four ETFs, investing an equal dollar amount into each (an admittedly simple and problematic approach). For the energy portion, one may decide to invest in Solar and Wind via Guggenheim Solar ETF (TAN) and First Trust ISE Global Wind ETF (FAN). For emerging tech, you may prefer innovation and security investment via ARK Invest Web X.0 ETF (ARKW) and PureFunds ISE CyberSecurity ETF (HACK). This thematic investment basket, investing 25% in each ETF at the beginning of 2015, would have lost you an expected 2.28% a year with a volatility of 20.17%. This was caused largely by TAN losing on average 34.76% a year, while FAN, ARKW, and HACK all posted gains. However, keep in mind, with thematic investing, your belief is that a structural change is taking place and that the future will not resemble the past. Therefore, what matters more is your conviction on the road ahead, not the road you’ve traveled thus far.

*This is not a recommendation for an investment nor a strategy.

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