What is thematic investing? Invest in growth areas, but there is also concentration risk AI semiconductors security renewable energy The core is broad, the theme is small Utilize satellites based on indexes Growth potential is high, but be careful of price fluctuations and falling expectations

What is thematic investing?

Thematic investing is a method of investing that focuses on social changes and growth fields that are expected to grow in the future.

For example, there are themes such as:

  • AI
  • semiconductors
  • Cybersecurity
  • Renewable energy
  • Space development
  • Medical technology
  • robot
  • defense
  • Water resources

In normal individual stock investing, we look at questions such as `Is this company undervalued?'' Is profit growing?'' and `Is the company financially sound?''

In thematic investing, we first ask a slightly bigger question.

Will this social change really last?
  ↓
Which companies will see sales and profits increase due to these changes?
  ↓
Are current stock prices taking too much into expectations?

This is important.

"AI will grow" and "If you buy AI-related stocks, the stock will go up" are not the same thing. Even if the theme is correct, if the purchase price is too high, the investment performance will be poor.

Thematic investing structure

Thematic investment spreads from one growth field to multiple companies.

In the case of AI, for example, it's not just AI software companies that are involved.

Related fieldsexample
semiconductorsGPU, memory, AI accelerators
data centerServers, cooling and power equipment
cloudAI usage infrastructure, corporate services
softwareBusiness efficiency and generation AI tools
securityData protection, access management
Power/InfrastructurePower demand, power transmission and distribution, air conditioning

The larger the theme, the more related companies there will be.

However, the more affiliated companies there are, the more diversified the company is. Even if you buy multiple AI-themed products, if the content is biased toward large tech or semiconductors, you may be essentially risking the same risks.

FINRA describes concentration risk as the risk that losses can be amplified when a large percentage of assets are concentrated in a particular investment, asset class, or market segment. This bias naturally tends to occur in thematic investing.

Main methods of thematic investing

There are several ways to do thematic investing.

methodFeaturesPoints to note
individual stocksIt's great if you hit the targetA company analysis is necessary, and if it is omitted, there will be a big loss.
Thematic ETFYou can invest in multiple companies at onceContents may be biased
Thematic investing trustThere are also products that are easy to save in small amounts.I want to check fees and trust fees
Wide index + theme small amounteasy to manageIt is necessary to manage the ratio of the theme part

Investor.gov explains that while ETFs that invest in multiple companies or industries can help reduce risk, some ETFs have low diversification.

The Japan Securities Dealers Association's J-FLEC ``Investing Time'' explains that ETFs are bought and sold like stocks on stock exchanges, and their prices fluctuate in real time on the market. When using themed ETFs, you can't necessarily leave them alone in the same way as investment trusts.

Examples of themes that tend to attract attention

AI

AI is related to a wide range of fields such as generative AI, business efficiency, autonomous driving, medical care, finance, and manufacturing.

Points to see

  • Are AI-related sales really growing?
  • Are R&D expenses and capital investment putting pressure on profits?
  • Can you win against competition with major companies?
  • Will the use of generative AI end up being a temporary experiment?

Although there is actual demand for AI, it tends to be bought based on anticipation. I would like to look at the value of technology and the height of stock prices separately.

semiconductors

Semiconductors are essential for AI, smartphones, automobiles, industrial equipment, data centers, etc.

Points to see

  • Isn't the demand a temporary increase in inventory?
  • Is the capital investment cycle overheating?
  • Is there a risk of price declines or inventory adjustments?
  • What field, such as manufacturing equipment, materials, design, memory, etc.

While semiconductors are a long-term theme, they are susceptible to economic cycles. The stronger the period, the more likely it is that expectations will rise.

cyber security

As digitalization advances, companies and governments need to strengthen their defenses against information leaks, unauthorized access, and ransomware.

Points to see

  • Are recurring billing sales increasing?
  • Is the customer churn rate high?
  • Can it withstand competition from major cloud companies?
  • Is there a profit or is there a cost upfront?

Demand is easy to understand, but competition is also fierce. We need to look at profit margins and customer retention, not just sales growth.

renewable energy

Renewable energy is a topic related to decarbonization, electricity supply, and energy security.

Targets include solar, wind, batteries, power grids, and hydrogen.

Points to see

  • Will policy support continue?
  • Will the project profitability deteriorate due to rising interest rates?
  • What is the impact of equipment costs and raw material prices?
  • Are you relying on subsidies?

Renewable energy is a major social trend, but as an investment target it is strongly influenced by policy, interest rates, and profitability.

space development

Space development is a theme that extends to satellite communications, rockets, earth observation, positioning, defense, data services, and more.

Points to see

  • Are sales stuck at the research and development stage?
  • Do you have commercial or government contracts?
  • Are you relying too much on financing?
  • Is it taking too long to reach profitability?

The space theme is a big dream. That's why we often look at profits over sales, and cash over profits.

Advantages of theme investing

Aim for big growth

If a theme truly spreads throughout society, the sales and profits of related companies can increase significantly.

In the past, the Internet, smartphones, cloud computing, and e-commerce have become major investment themes.

Easy to understand investment targets

Thematic investing has an easy-to-understand story.

It is easy to connect news and investment in the form of `the use of AI will increase,'' the demand for electricity will increase,'' and `countermeasures against cyber attacks will become necessary.''

This ease of understanding provides an opportunity to continue studying investment.

Easy to diversify starting from a small amount

Thematic ETFs and mutual funds allow you to invest in multiple companies with one product.

It may be easier to reduce company-specific risk than selecting individual stocks one by one.

However, this is "diversification within a theme" and is different from "diversification of assets as a whole." Even if it is distributed among 10 AI-related companies, if the entire AI theme is sold, it will likely fall at the same time.

Disadvantages of theme investing

Boom end risk

The scariest thing about theme investing is buying something after it becomes a hot topic.

By the time a stock becomes noticeable on TV, social media, securities company rankings, or investment trust rankings, expectations may already be high in the stock price.

If expectations are too high, the stock price will fall even if the financial results are slightly positive. The market doesn't look at "good" but rather "does it exceed expectations?"

large price movements

Theme stocks are likely to be bought based on growth expectations.

However, rising interest rates, disappointing financial results, policy changes, intensifying competition, and tightening regulations can lead to large sales.

The Financial Services Agency explains that while investment products such as stocks and investment trusts can offer higher returns than deposits, there is a risk of loss of principal. Thematic investments tend to have even larger price movements.

Product contents tend to overlap

AI themed ETF, semiconductors ETF, NASDAQ affiliated investment trust, US large-cap investment trust.

Even if the names are different, if you look at the content, there is a lot of overlap with large tech and semiconductors companies.

Even though you are buying multiple products, you are essentially betting in the same direction. This is a common pitfall in theme investing.

Fees may be high

Thematic products may have higher trust fees than broad index funds.

Even if the fees are high, there is no problem as long as the return exceeds the fees. But when a theme stalls, costs are sure to remain.

Before purchasing, I would like to check the trust fees, trading fees, exchange costs, distribution policy, total net assets, and liquidity.

How to use it for beginners

It is more realistic to use thematic investing as a satellite rather than as a central part of asset formation.

For example, there is the following idea.

RoleExamples of investment destinationsConcept
CoreWorld stocks, US stock indexes, balanced typeFoundation for long-term asset formation
SatelliteAI, semiconductors, cybersecurity, renewable energy, etc.Aiming for learning and additional returns
CashLifestyle defense funds, short-term fundsExtra margin to avoid being sold during a market crash

To give an example of allocation, thematic investings should be limited to only a portion of the total assets.

Core assets: 80% to 90%
Thematic investment: 5% to 15%
Cash, etc.: Separate allowance for livelihood defense funds

This is not a recommended ratio. It varies depending on age, income, family structure, investment experience, and risk tolerance.

However, if a beginner focuses on theme investing from the beginning, the price fluctuations will be too large and it will be difficult to continue. By keeping it small, it is easier to prevent damage to the overall asset while learning the price movements and financial results of the theme.

Checklist before buying

Before buying a theme-type product or individual stock, I would like to confirm at least this much.

  • Has the theme become a temporary buzzword?
  • Is the theme linked to sales and profits?
  • What are the top stocks of products?
  • Does the content overlap with investment trusts or ETFs you already own?
  • Are trust fees and buying and selling costs too high?
  • Is there a currency risk?
  • Are the total net assets and trading value sufficient?
  • Are assets too concentrated in one theme?
  • How many percentage points can you hold if your expectations are not met?
  • Have you decided on selling criteria?

In thematic investing, the reasons for selling tend to be more vague than the reasons for buying.

Even though they say, ``It's a long-term theme,'' they may actually ignore deteriorating financial results and intensifying competition. If you want to hold onto it for a long time, you need materials that will last you for a long time.

Common mistakes

Jump to the news

In many cases, the stock price of a topic that has become a hot topic has already increased considerably.

Before buying after watching the news, I want to think about whether this is new information or whether it has already been factored in.

I believe in the theme too much

AI grows. Requires semiconductors. Renewable energy is necessary for society.

Even if this is true up to this point, investment is not enough. Even if the technology is necessary, if competition is too intense, it will not be profitable. Even if the market is large, there are companies that do not lead to shareholder returns.

Satellite swallows core

At first, I only intended to invest 10% of my assets in thematic investings, but due to price increases and additional purchases, my investment has increased to 30% or 40%.

In this state, the entire asset is swayed by the price movements of that theme. Review ratios regularly and rebalance if necessary.

Buying too many themed products

AI, semiconductors, robots, NASDAQ, cloud, cybersecurity.

At first glance, it appears to be diversified, but if the top stocks are similar, the diversification effect is weak.

FINRA also explains that simply owning investment trusts or ETFs does not necessarily protect you from concentration risk, and it is important to look at the details of your holdings.

Summary

Thematic investing is an investment that takes advantage of social changes.

AI, semiconductors, cybersecurity, renewable energy, space exploration, etc. have the potential to create large markets in the long term.

However, even if the theme is promising, it does not guarantee that it will be a successful investment. If you buy it after it becomes popular, you can easily grab a high price, and concentration risk remains even with themed ETFs and investment trusts.

Beginners should keep in mind the following order.

Create a core using index etc.
  ↓
Try a topic of interest for a small amount
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Check product contents and duplicates
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Review financial results, policies, and competitive environment
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Adjust the ratio if it becomes too large.

Thematic investing, if used well, can be an opportunity for investment learning and growth.

However, if you make it the main character too much, your entire assets will be thrown around. The core is broad and the theme is small. At first, that sense of distance is just right.

Reference