FactSet Research : Thematic Investing Catches Fire

Thematic Investing Catches Fire Data Science and Technology

By FactSet Insight| December 27, 2021

While the concept of thematic investing has been around for many decades, investor appetite has been steadily growing.

In 2019, funds that tracked indices overtook individual stocks for the first time and over the past three years, assets in thematic exchange-traded funds have grown at an average of 45% annually.

The rising popularity of such investments is even more clearly illustrated when analyzing respondent portfolios. Investors surveyed by FactSet/Forbes Insights in March 2021 report holding (on average) 28% of their total portfolios in thematic instruments or strategies. These same investors expect that figure to steadily grow over the next few years. In fact, within 18 months, investors expect that their total investment in thematic strategies will rise to an average of 35% (a growth rate of 25%), and within three years, they expect it to climb to 42%, which is an additional 20% growth (Figure 1).

A key insight relating to the just-cited statistics regarding the growth of thematic investments within portfolios is that there is little variance owing to the location or size of the firm. Except where explicitly noted, this homogeneity is evident throughout the survey findings. Given that this survey reached firms of all sizes worldwide, this is a remarkable finding-the rise and growth of thematic investing is truly a global phenomenon.

Thematic Investments Are Accelerating Investors Use Multiple Approaches to Thematic Investing

Thematic investing as a concept is nothing new, but what is changing, says Jeremy Zhou, Head of Index Solutions at FactSet, is that the practice was once achievable primarily through active investment. This required massive caches of capital. "Since an asset manager would need to maintain a large team of domain experts to research and sift through assets that most closely portrayed various themes, thematic investing was largely reserved for the largest of portfolios," he adds.

Today, however, investors can access thematic investments via exchange-traded funds (ETFs), exchange-traded products (ETPs), or index funds. Note that our research tested the number of firms using these approaches but did not test the extent. With that caveat in mind, the most frequently cited avenue for thematic investment today is the ETF, which is being leveraged by 80% of respondents interested in thematic investing. Firms are also using index funds (55%), actively managed instruments (51%), ETPs (43%), and other passive instruments (31%).

The most frequently cited avenue for thematic investment today is the ETF, which is being leveraged by 80% of respondents interested in thematic investing.

Firms Are More Likely to Use ETFs Than Other Approaches

Over the next 18 months, the predicted use of ETFs declines to 65% while ETPs and index funds jump to 58% and 64%, respectively. The expected use of other passive instruments rises to 41% while actively managed instruments climb to 57%.

In three years, the ranks of those expecting to use ETFs again declines (to 56%), but even so, these instruments are still projected to be the top tool to pursuing thematic investing goals, followed closely by index funds (54%), actively managed instruments (51%), other passive instruments (44%) and, finally, ETPs (43%).

Asset Managers Are Working with Clients to Create New Thematic Instruments

One factor driving the rise of thematic investing is that asset or fund managers-often at the request of a specific investor-can now develop, research, and create a pool of investments that exhibit a specific theme. Possibilities are nearly endless. In our survey, when investors were asked to write in some of the themes they plan to pursue in the future, blockchain, climate change, and cryptocurrency were frequently cited.

Blockchain, climate change, and cryptocurrency were frequently cited as the themes that investors plan to pursue in the future.

Almost any key trend can be isolated within a thematic index. Another example to consider is pet ownership. "Pet ownership is on the rise all over the world as more people are reaching the middle class and having fewer children," says Zhou. "To build out an ETF or similar product, you would closely examine the degree to which an individual company is poised to benefit from this trend and then try to capture the whole picture from there."

Packaging a theme into an ETF or an index essentially industrializes traditional thematic investing. Since the offering is exchange traded, it "creates greater liquidity and enables asset managers to democratize investment concepts to a wider range of investors," says Zhou.

Read more in our previous article and our eBook, Investors Are Hungry for Thematic Investments: It's Time to Seize Opportunity and Build New Index Products.

Disclaimer: The information contained in this article is not investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.