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Investing in ideas

Key takeaways

  • Thematic investing strategies consider long-term trends, ideas, beliefs, and values when choosing stocks, bonds, mutual funds, ETFs, and other investments.
  • Among the most popular types of thematic strategies are those focused on disruption, megatrends, sustainable investing, differentiated insights, and outcomes.
  • Thematic mutual funds or ETFs may provide opportunities to invest in themes plus the benefits of professional investment research and management.
  • Make sure to look under the hood to understand how a thematic fund works and how it could fit into your overall investment plan.

Want to invest according to your personal beliefs and values? Well, you may be in luck. Driven by investor demand, a new type of investment strategy, so-called thematic funds, are capturing the spotlight. Now you can find funds to help you invest based on where you believe the world is headed—or where you want it to go. There are funds based on disruptive trends like cloud computing and autonomous vehicles, as well as value-based strategies like those focused on women-run companies and environmental sustainability, and outcome-focused investments like those aimed at reducing portfolio volatility or protecting against inflation. The key is finding quality funds that align with your values and beliefs, which also fit into your investment plan.

Thematic investing: What’s different

Thematic investing strategies focus on finding potential opportunities created by economic, technological, and social developments that unfold over long periods of time. This approach differs from more traditional ways of selecting investments. Among them: a focus on stocks of a particular region (US stocks, for example), style (growth stocks), or economic sector (health care, technology). Instead, thematic strategies follow ideas and may cut across stock categories and even include other asset classes such as bonds or real assets like commodities or real estate.

Not all thematic funds are created equal, so investors should consider potential risks. Some funds may seek to capitalize on investor enthusiasm regarding short-term trends in markets, technology or society. We believe this approach poses significant risks and recommend instead that thematic investors look to strategies that rely on rigorous research and a long-term perspective.

While the number of investible themes is potentially as large as the number of ideas that an investor can conceive of, there are 5 broad types of thematic investing that we believe offer investors well-defined and potentially compelling options for personalizing their portfolios to reflect their ideas, beliefs, and values.

1. Disruption

The world changes fast, and many of today's successful companies may be gone 10 years from now, replaced by firms that don’t yet exist. Disruption funds seek to understand long-term shifts in profits, as the market responds to technological advances, emerging industries, and changing consumer preferences.

Investors in disruption may benefit from the fact that financial markets tend to underestimate how quickly technology can cause rapid change in "business as usual." A disruption fund may focus on long-term trends that are still in the early stages of development such as cloud computing, autonomous vehicles, and AI chatbots. Investing in a disruption theme may mean investing in companies that are directly driving long-term changes or potentially affected by those changes.

2. Megatrends

Many significant changes happen gradually. Some observers can see these changes coming but might not grasp how they will transform the world. Megatrend funds focus on understanding long-term profit growth driven by forces such as demographics or technology. By identifying these powerful, slow-moving trends, megatrend investors may benefit from anticipating their market-shaping effects such as shifts in consumer demand as populations grow older, or increased competition for natural resources due to population growth.

3. Sustainable investing

Sustainable investing may provide a way to invest in a strategy that reflects a disciplined evaluation of these considerations.

Today, the term "sustainable investing" is often applied to many different goals and approaches, so investors should consider what their most important goals are and pick the themes they want to focus on. To help them do that, we organize sustainable investing themes into 3 groups shown in the table. While all can align with investors' values, we believe "thematic" sustainable investing funds are the ones many investors seek in order to express their values and to show concern regarding longer-term trends because these funds reflect long-term environmental, social, and governance themes.

Sustainable investing approaches may require research to determine which companies are truly dedicated to a subject. Environmental themes could include investing in companies that pollute less or produce alternative energy technologies. Social themes might include investing in companies that seek to provide safe working conditions or identify and target business opportunities in underserved areas. Governance themes could include composition of company boards and oversight, management incentives, capital allocation, and shareholder-friendly policies.

Each of these 3 categories of sustainable investing has its own way of selecting investments.

Negative/Exclusionary screening Sustainable investing integration Thematic sustainable 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 (Environmental, Social, and Governance) 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 or gambling.
  • Guided by financial materiality and relevance at the sector and industry level

  • Alternative/clean energy
  • Gender and diversity

4. Differentiated insights

Differentiated insight thematic funds can give investors exposure to targeted ideas and investment selections that arise from unique insights that don't fit comfortably into other categories. These themes may reflect a unique investment view or belief about what makes a company an attractive investment, based on research and may give investors a long-term advantage. For example, some differentiated insight funds pursue companies led by their founders, based on the belief that the passionate involvement of a founder gives those companies an advantage.

5. Outcome-oriented

Outcome-oriented thematic funds are designed to fulfill a specific objective within a portfolio, which may help an investor weather long-term market changes and trends. For example, an investor wants to invest in US stocks, but is worried about inflation over time. An outcome-oriented thematic fund could provide exposure to market sectors and companies that have historically performed well during times of high or rising inflation. Another example of an outcome-oriented fund might be one designed to provide more consistent returns by investing in stocks that have historically been less volatile.

How to invest in themes

Investors who want to put their money where their beliefs are should consider carefully whether the strategy of a thematic fund aligns with those beliefs and how it fits with their overall investment plan. For example, is a broad or concentrated fund preferable? A broad fund with a diverse range of holdings may be able to play a larger role, because its balance between return and risk may closely resemble that of the overall stock market. Many sustainable investing funds are designed to resemble a broad market index, while favoring companies that align to specific values. On the other hand, a more narrowly defined thematic fund that holds fewer stocks or bonds may be more appropriate to use as a focused building block within a portfolio. For example, a cloud computing-focused disruption fund may only represent a small portion of an allocation to stocks within a portfolio.

Investing in ideas requires research to find the companies that best represent a theme. Thematic investing mutual funds or ETFs have professional research teams and portfolio managers who do that work. Thematic funds also allow investors to diversify their investment in a theme. An individual investor may add a small number of stocks related to a theme to their portfolio, but investing in too few stocks can add additional risk. Not all companies will benefit equally from their connection to a theme. Investing in a fund with many stocks connected to that theme can spread the risk.

Learn more about thematic investing strategies.

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This information is intended to be educational and is not tailored to the investment needs of any specific investor.

Fidelity does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation.

Investing based on environmental, social and corporate governance (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.

Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal.

Exchange-traded products (ETPs) are subject to market volatility and the risks of their underlying securities, which may include the risks associated with investing in smaller companies, foreign securities, commodities, and fixed income investments. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks, all of which are magnified in emerging markets. ETPs that target a small universe of securities, such as a specific region or market sector, are generally subject to greater market volatility, as well as to the specific risks associated with that sector, region, or other focus. ETPs that use derivatives, leverage, or complex investment strategies are subject to additional risks. The return of an index ETP is usually different from that of the index it tracks because of fees, expenses, and tracking error. An ETP may trade at a premium or discount to its net asset value (NAV) (or indicative value in the case of exchange-traded notes). The degree of liquidity can vary significantly from one ETP to another and losses may be magnified if no liquid market exists for the ETP's shares when attempting to sell them. Each ETP has a unique risk profile, detailed in its prospectus, offering circular, or similar material, which should be considered carefully when making investment decisions.

In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities). Fixed income securities also carry inflation risk, liquidity risk, call risk and credit and default risks for both issuers and counterparties. Lower-quality fixed income securities involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Foreign investments involve greater risks than U.S. investments, and can decline significantly in response to adverse issuer, political, regulatory, market, and economic risks. Any fixed-income security sold or redeemed prior to maturity may be subject to loss.

Past performance is no guarantee of future results.

Diversification and asset allocation do not ensure a profit or guarantee against loss.

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