Investors love investing in themes. But should they?
New investment themes offer an on-ramp to buy into the future. Thematic investing also provides a way for investors to own assets poised to profit from emerging trends they believe in and are passionate about. And you can profit from a theme without picking the individual winners. But investing in themes can be unpredictable.
A good example is artificial intelligence. AI is quickly emerging as a thematic investment Wall Street says should be part of every investor's portfolio. Other examples of investable themes range from caffeinated drinks and cancer research to active lifestyle and autonomous driving. Charles Schwab also offers its clients ways to invest in the pet economy to precious metals.
History Of Investing In Themes
Thematic investing isn't new. Morningstar traces the history of thematic funds back to 1948 with the launch of The Television Fund. That fund looked to profit from the debut of color TV. In the mid-1950s, a handful of tech-focused thematic funds opened, including the Missiles-Rockets-Jets & Automation Fund. Today, of course, there are plenty of thematic ETFs and mutual funds to choose from. Some well-known ones include the Global X Robotics & Artificial Intelligence ETF and the ARK Genomic Revolution ETF.
But outside of these fund offerings, do-it-yourself investors face obstacles when investing in themes. Charles Schwab is trying to change that. Next month, all its retail customers will get access to its new thematic investing platform called Schwab Investing Themes.
The discount brokerage rolled out a list of roughly 900 thematic stocks to self-directed investors last year. It's now taking investing in themes a step further. It's rolling out a trading platform that enables clients to invest in one or more of its 45 investment themes that feature up to 25 stocks each with a click of a button.
The themes are "off the shelf." But investors can still tailor their holdings, says Isaac McGuffin, director of thematic investing at Charles Schwab. The platform allows investors to be their own portfolio manager and customize a Schwab-picked basket of theme stocks to their own liking. They can add or delete stocks from the basket or adjust the weightings of holdings.
Schwab Targets Investors Investing In Themes
How is this method of investing in themes different from just buying an ETF? Unlike with ETFs where investors own the fund but not the underlying assets, investors own all the stocks in the Schwab Investing Themes baskets.
"It's a really self-directed experience designed for retail investors," said McGuffin. "It's an interesting way for clients to engage with their investments. Maybe they're interested in investing in cancer research or dining out is their passion; now with one click they can invest in a theme they're excited about."
Schwab is trying to help investors skip investing in themes that are just passing fads. "The themes are growth-oriented and have runways of 10 years or more," said McGuffin. "So you're not going to see themes that are going out of fashion soon or have a short-term focus."
Themes can also tie into personal convictions. Americans are increasingly investing with their values in mind. Eight in 10 Americans say their personal values and interests play an important role in their investments, according to Schwab's "2022 Modern Wealth Survey." Increasingly, investors are willing to look beyond traditional investment lenses — such as sectors, growth vs. value, and geography — in their search for fresh growth drivers.
AI Opens Up Thematic Investing
AI isn't just a theme you can invest in. The technology is also being used to create themes.
The Schwab Investing Themes platform does a lot of research for investors. Its algorithm uses natural language processing to analyze millions of public documents such as patents, clinical trials and regulatory filings to find stocks that fit a specific theme. The algorithm ingests thousands of pages of text and quantifies thematic relevance for companies, saving investors a lot of time and energy, says McGuffin. The holdings in each thematic investing basket are weighted by market cap and theme relevance.
Schwab says its new thematic platform caters to investors hoping to use AI to get an edge. There are no added fees. And investors can get started with as little as $250. That minimum plus the ability to purchase fractional shares means investors can buy all the stocks that make up each thematic investment basket. Plus, investors don't have to worry about picking a single stock winner in any theme.
Investing In Themes Simplified
The Schwab Investing Themes platform aims to be as easy as buying an ETF. Click on the theme you want to invest in, and you'll be greeted with an overview page that describes what the theme is all about and why it has potential. You can view a chart showing the one-year performance of the theme compared with the S&P 500, as well as the theme's volatility and valuation.
After reviewing the theme's holdings and weightings, which have been determined by Schwab's research team, click on the "trade" icon and select buy, then add the dollar amount you want to invest. Before confirming your trade, you will see how many shares of each stock you're purchasing, as well as the total number of shares of the theme basket you're buying.
Once the trade is confirmed, you can track your theme holding or holdings at an theme-specific dashboard. Don't worry: You're not locked into Schwab's choices of stocks in a theme. Investors can customize the theme's holdings.
Let's say you want to buy into the AI theme, but you work at Microsoft. You don't want to own any more company stock as a result. Just "delete" Microsoft from the list of holdings. Schwab's Investing Themes trading platform will automatically re-weight the remaining stocks in the basket. You also can add new stocks to the thematic basket as well as adjust any holding's weightings. The trading platform allows up to 30 stocks for customized portfolios, McGuffin says.
Downsides Of Investing In Themes
Still, as with any investment, specific themes that hold baskets of stocks aren't guaranteed to beat the market. They usually lag.
In fact, so-called theme funds tracked by Morningstar delivered annualized total returns of 7.2% vs. a 10.6% return for Morningstar's U.S. Market Index from January 2017 (when enough theme funds existed to merit computing an average return) to April 2023, according to Morningstar's John Rekenthaler in a story published in June, titled "Thematic Investing: Just Say No."
When considering a thematic investment, it's important to do your due diligence. Don't get caught up in recent performance. And make sure the investment narrative offers good risk vs. reward.
In short, you must answer the question: Is the theme you're interested in or passionate about a legitimate long-term growth story?
