How thematic investing works (and when it doesn’t)

But while thematic investing might be great for people who like to romanticise their lives or those of us who are just living for the plot, it can come with some serious downsides: the risks are high, the fees can stack up, and the "next big thing" doesn't always pan out as planned.

We’ll look at the pros, cons, how to invest, and some popular funds.

Pros of thematic investing

Plenty of people have jumped aboard the thematic hype train, with one study suggesting two-thirds of Europeans are doing it. So, what’s all the excitement about?

Potential for higher returns

Let’s get this one out of the way first. The big allure of thematic investing is the hope of outperforming the market. If you pick the right trend, you might see your money grow faster than if you’d just stuck it in a plain old global index fund. 
 
For example, in 2023-24, the WisdomTree Blockchain ETF delivered a 103.15% return – that’s over 90% higher than the typical annual return of a global index fund.  
 
Big caveat, though: the potential for higher returns is just that – potential. It’s far from guaranteed, and the line between “early adopter” and “bag holder” is thinner than you think. In the same period that the WisdomTree fund knocked it out of the park, Invesco Solar Energy delivered a one-year return of -42.99%. 
 
So, never bet the farm; think of it as a possible boost, not a sure thing.

Adds a bit of of diversification

Most index funds and big ETFs stick to the usual suspects – lots of Apple, Microsoft, and Amazon, with a sprinkling of banks, oil companies, and a surprise dash of toothpaste manufacturers. 
 
Thematic investing lets you spread your money into corners of the market that a regular index fund might ignore completely, like agricultural technology, cyber security or even services that cater to our ageing population. 

Helps you stay focused on the long-game

Themes, by their nature, are about the future. You’re betting on trends that should play out over years, not weeks. This can help you ride out short-term wobbles and ignore the latest “market panic” headlines.

If you genuinely believe in the long-term story – say, a move to net zero, or a boom in AI – you're more likely to hold steady during a rough patch, which can be a good lesson in discipline and patience. 

Invest in what you believe in

Maybe you’re not a fan of the way tech billionaires seem to dominate every index fund, or you’re just plain resentful about the way your pension seems to rise and fall depending on Elon’s latest tweet.
 
With thematic investing, you can support causes or industries that actually matter to you, whether that’s clean water or companies that treat their workers (and the planet) a bit better.
 
And yes, it’s totally fine if your “theme” is just “I really like robots”.

We’ve also delved into this topic over on our YouTube channel, so if you prefer your investing tips with a side of moving pictures (and maybe the odd chart), check it out below:

Cons of thematic investing

To quote Rupert Hargreaves from Morningstar when talking about thematic investing: "To say that performance has been an issue would be unduly kind". It definitely has its critics, so what should you be most concerned about?

You're in for a wild ride

The trouble with investing in trends is that nobody knows for sure which ones will take off and which will fizzle out faster than a Love Island romance. 
 
Take 2024, for example: more thematic funds closed down than launched, which tells you how quickly the market can lose interest.
 
Added to that, most funds still struggle to keep up with the market as a whole. Only 18% of thematic funds beat or matched the returns of the Morningstar Global Target Market Exposure index in 2024 – a basic benchmark that tracks the biggest, most established companies around the world.

Stretch that out over 15 years, and just nine percent of thematic funds came out on top.
 
When you think about it, it’s not just one thing that needs to pan out perfectly, it’s three: the theme must gain momentum as expected, the companies in the portfolio must benefit significantly from the trend, and you as an investor must buy in at the right price.

Another thing to bear in mind is that with thematic ETFs, the losers often lose more than the winners win. You can see what we mean by this chart, which shows the annualised excess returns of the top six and bottom six performing themes since 2020:

You could be flying blind

With a global index fund or the S&P 500, you’ve got decades – sometimes nearly a century – of data to help you sleep at night.

You can see how the market handled wars, recessions, pandemics, and at least three different Spider-Man reboots. So when things get rocky, there’s plenty of history to reassure you: the market’s been here before, and it’s made it out the other side.
 
With most thematic funds, you just don’t get that kind of reassurance. For example, if you jump on the AI hype train and pile into the WisdomTree Artificial Intelligence ETF, you’re looking at a fund launched in 2018. That’s barely long enough to cover a couple of iPhone releases, let alone a proper market cycle.
 
And it’s not just about missing out on comfort, either. History also helps you spot patterns (and pitfalls). Just ask anyone who backed “hot” internet stocks in 1999, right before the dot-com bubble burst. Back then, the internet really was the next big thing...until it wasn’t, and those shiny tech investments crashed harder than a dial-up modem after your mum picked up the upstairs phone. 

Reduced diversification

Sure, thematic funds can help diversify your portfolio if they’re just one part of a broader, global-based investment strategy. But if you go all-in on a single theme, you’re actually putting a lot of your eggs in one basket (even if it’s a very trendy basket).
 
If your fund only invests in one particular sector, it only takes a single event to throw everything off course. Maybe the bubble bursts, maybe new legislation makes life tricky for those companies, maybe the world just moves on to the next big thing. Either way, entire industries can fall out of favour faster than you think.
 
Investing in a thematic ETF – a basket of funds tracking a list of companies with shared characteristics – does still give you some diversification as you’re spreading your money across lots of different companies, rather than betting it all on just one. But, since they’re all tied to the same sector, if that whole industry takes a hit, so does your fund.

Growth might already be priced in

A wise man (probably) once said that if you’re excited about an investment, it’s not a good investment. And if you’re excited about an investment, chances are, everyone else is too. 
 
This means that by the time you hear about it, the price has likely already shot up because other investors have jumped in ahead of you, and the potential is already baked into the share price. It’s the same logic as picking individual stocks.

For you, that means that even if the industry does keep growing, you might not see blockbuster returns, unless it does even better than everyone already expects.
 
On top of this, when the market gets excited about a new sector, companies rush to cash in by issuing new shares to raise money. Suddenly, you’re not just sharing in the growth with a handful of early investors; there’s a flood of new companies and shares, all competing for the same attention, which can dilute the potential gains for everyone.
 
A classic study from 2003, “Earnings Growth: The Two Percent Dilution,” pointed out that even if a new industry offers big potential, the sheer number of new shares often means that earnings per share don’t grow nearly as much as the total profits.
 
Or, as Warren Buffett allegedly put it: “You pay a very high price in the stock market for a cheery consensus.”

Higher fees

Thematic funds are usually smaller and have fewer investors than the big mainstream funds. Because of that, fund managers need to charge a bit more to make it worth their while. Tracking a niche theme takes more work, and there are fewer people to split the bill.
 
So, thematic investing usually comes with higher fees than your average global index fund or bog-standard ETF. How much higher? On average, actively managed thematic ETFs charge around 1.1% per year, compared to about 1% for non-thematic active funds. That’s not a massive jump, but it does add up, especially over a few years.
 
And it’s not just the active funds. Even passive thematic ETFs – those that simply track a theme with little day-to-day fiddling – cost more: about 0.6% a year, versus 0.5% for regular, broad-market passive ETFs.

How to invest in thematic funds

Still want to try to back that dark horse? Alright, saddle up. 

You can invest in thematic funds in a couple of different ways. One option is to go for a thematic mutual fund, where a professional fund manager picks the companies they believe best fit the theme and manages the portfolio for you (for a fee, of course).

Or, if you’d rather keep things simple – and cheaper – there are thematic ETFs. As we've already covered, these funds track a whole basket of companies linked to your chosen theme and can be bought and sold easily through most investing platforms.

Finding thematic ETFs

Platforms like Trading 212 and InvestEngine make it easy to find thematic ETFs by including thematic filters:

Others, like Freetrade, don't do this, so you'll need to do the hard yards yourself by researching thematic ETFs elsewhere, then searching for the exact one you want.

Here’re some examples of thematic ETFs traded in GBP, what they do, and each fund’s TER (the annual fee charged by the provider). They're all accumulation funds, meaning any dividends earned are automatically reinvested back into the fund, rather than paid out to you as cash.

They’re not recommendations, and past performance is no guarantee of future results – they’re just a list of some of the funds with the lowest fees across a range of themes that are available on most trading platforms.

Thematic ETF examples

Just bear in mind that depending on which broker you're using, other fees may apply. You can find out at a glance which brokers charge what and compare your options using our broker comparison tool.

Is thematic investing a good idea?

It's not for us to tell you where to invest your money; maybe you do have a knack for spotting the next big thing before everyone else (in which case, congratulations and please send us next week’s lottery numbers).

But, if getting rich were as simple as spotting the next big thing, we’d all be sunning ourselves on private islands by now. Thematic investing can be a fun way to back the trends you’re obsessed with, but it’s not a free ticket to outsized returns, no matter how good your hunches are.

If you treat it as a bit of fun for your portfolio, go for it. Just don’t bet your pension on the “rise of the robot dogs” ETF and expect to retire at 45. 

Most of the time, the market has already factored in the hype, so unless you’ve genuinely got a crystal ball, keep your expectations in check.

Bottom line

Thematic investing is all about putting your money behind the trends and ideas you believe will shape the future. It can make your portfolio feel a bit more exciting (and maybe even a bit more “you”). But, it’s not without its pitfalls. The risks are higher than with broad, traditional funds. Most thematic funds charge higher fees, have less data to fall back on, and – despite all the hype – most don’t manage to beat the good old-fashioned global market in the long run. There’s always a chance you’ll catch the next big wave, but you’re just as likely to end up holding a fund that fizzles out or underperforms.

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