Utilizing Thematic Investing in Client Portfolios

By Michael Sheldon, CFA®, CFP®
Vice President and Senior Portfolio Manager
Washington Trust Wealth Management

There are a number of different ways to construct and manage investment portfolios.  One strategy is called Thematic investing, which is the focus of this piece.  It involves identifying 1) attractive long-term secular trends   that are expected to continue for an extended period regardless of economic fluctuations) and 2) companies that are likely to benefit from these trends over a multi-year period as technological and fundamental industry changes take place.  Thematic investing has been around for some time and is not new. 

Based on data from the industry research firm Morningstar, assets invested in thematic funds have grown from $269 billion five years ago to $552 billion over the past 5 years. According to the financial web site www.ETFGI.com, as of April 2025 there were 1,582 ETFs listed on 53 exchanges that focused on thematic investing.  Looking at research from the ETF giant Blackrock, they highlight that in the ten years through December 2024, assets in thematic investments increased 10.3xⁱ.

Another way to manage investment portfolios is to look at the economy from a macro (i.e. top-down) perspective.  This means uncovering which of the 11 S&P 500 sectors (for example technology, industrials, healthcare or financials) are poised to under or outperform over a given time period.  Companies within these sectors are then identified based on a number of fundamental characteristics that might include things like sales, profits, earnings, free cash flow, balance sheet strength, return on equity etc. In addition, portfolio managers would have to decide whether to under or overweight large capitalization stocks versus small capitalization stocks, if they should tilt the portfolio more towards growth versus value, and how much foreign versus U.S. exposure they might want to have.

When thinking about thematic investing, one important thing to consider is that you want to avoid investing in areas of the market that may be a passing fad, that lack staying power, that are financially unstable or that are likely to fail to gain traction versus existing industries or incumbent technologies.  There are a number of ETF families that have sprouted up in recent years that focus on thematic investing.  Investors need to do their homework and stay clear of ETFs that are too narrowly focused, are unlikely to generate sustainable profits, or focus on transitory as opposed to longer-term structural investment opportunities.  As a result of some of the issues highlighted above, when equity markets experience a period of instability, many of these ETFs can become extremely volatile and experience large drawdowns, leading to outsized impacts in client investment portfolios. 

When constructing investment portfolios based on thematic research, you want to thoughtfully analyze emerging trends and identify specific investments that are likely to benefit as these trends materialize and endure over time. We employ a three-step process to help identify and monitor the equity securities that we want to purchase and own in client portfolios.   

This multi-step process includes the following: 

1. Determine investable themes that could be dominant and the industries that are potentially best positioned to capitalize on them.
2. Select stocks in those favored industries using independent 3^rd party research that includes fundamental and quantitative analysis.  Those stocks that meet our thematic, fundamental and valuation criteria are considered attractive for purchase.
3. Employ a sell discipline to help manage risks associated with owning common stocks, such as selling a stock when: there are important changes in a company’s fundamentals, a stock fulfills our expectations and becomes overvalued, we identify new investment themes, or we uncover more attractive stocks to purchase. 

There are a number of questions that we review when determining what represents a worthy thematic investment.  For example:

• Are there real underlying fundamental factors driving the investment theme or is it more of a short-term speculative fad that is likely to fade with time?
• Is there data available from reputable sources to help support and corroborate the investment theme?
• Is the thematic investment broad enough that there are multiple investment opportunities to choose from or is it too limited in scope?

At Washington Trust Wealth Management, we hold investments in client portfolios over a multi-year time horizon.  However, we need to see demonstrated progress in terms of things like the introduction or rollout of new products and technologies over time.   

At any given time, we monitor 16 broad themes that we believe are likely to benefit due to significant structural changes taking place in global investment markets. Each year we review these 16 themes and decide whether to eliminate any of our current ideas and replace them with more dynamic new investment ideas.  Some of the themes that we are following right now include cybersecurity and data protection, artificial intelligence and data centers, global infrastructure, the aging of baby boomers and the rise of millennials.  

Here is some information on six of the thematic investment opportunities that we are currently following in our investment portfolios:

1. Cybersecurity – frequent threats and highly publicized cyberattacks have led to a strong demand for software to help protect states, municipalities, government networks and business enterprises. According to the industry research firm Gartner, due to rising threats from cloud technologies, increased adoption of AI as well as the need to protect critical infrastructure and enterprises of all sizes, spending on information security—estimated at $162 billion in 2023—is forecast to rise about 12.5% per year through 2028)ⁱⁱ.
2. Artificial Intelligence – technological advances in artificial intelligence and machine learning are likely to create new investment opportunities in areas like robotics, new drug discovery, supply chain efficiencies, defense / surveillance, and how companies operate their businesses. According to the research firm Grandview Researchⁱⁱⁱ, the global market for AI (including hardware, software and services) is currently forecast to grow at a 36% annual rate and reach $1.8 trillion by 2030. In a separate survey, the research firm IDC forecasts that global spending on AI and Generative AI is currently forecast to reach $632 billion by 2028^iv.
3. Regional over Global – to reduce our nation’s trade deficit, improve supply chain efficiency and make the U.S. less dependent on foreign countries, the U.S. government is promoting policies to help bring jobs and manufacturing activity back to the United States.  This means increased demand for things like robotics, factory automation, supply chain efficiencies and demand for skilled labor.
4. Global Infrastructure – due to increased demand for data centers, the need to improve the U.S. electric grid and rise in extreme weather, our country needs to generate more electricity and improve our country’s aging infrastructure.  For reference, U.S. power demand averaged just 0.1% growth from 2010 to 2020 but according to McKinsey & Company, is currently forecast to increase 3.1% per year from 2025 -2040^v.  According to Quanta Services, Inc., the country will need to spend $240 billion from 2022 to 2042 to replace and upgrade 96,000 miles of transmission wires.
5. The Rise of Millennials – millennials (i.e., individuals born between 1981 and 1996) have been early adopters of new digital technologies, often consider environmental and social causes, have shown themselves to be highly mobile, and are seemingly connected to multiple communication devices 24/7.  According to the Pew Research Center about 93% of millennials have smart phones (the highest figure among all generations) and 86% actively use social media platforms. Millennials are often seen as early adapters of new technologies and they have grown up in a rapidly evolving digital world.
6. Aging baby boomers – as baby boomers turn older, their spending patterns tend to change.  According to the U.S. Census Bureau, Americans born between 1946 and 1964 currently stand at 73 million today^vi.  The number of Americans aged 65 and older is forecast to rise from 58 million in 2022 to 82 million by 2050 (representing a 47% increase).  This demographic change has led to a number of investment opportunities in areas that include healthcare, weight loss, travel, casual dining, entertainment, pets and natural foods (just to highlight a few examples).

Thematic investing carries risks just like any other type of investing.  A few of these risks include:

1. Concentration risk – for example, if you have too much equity exposure in a very narrow segment of the market.
2. Liquidity Risk – for example, if you invest in companies that are hard to get into or out of due to low trading volume.
3. Timing Risk – as with any investment, you can be right about the investment trend and company fundamentals but be too early or too late when you make the actual portfolio investment.
4. Valuation Risk – popular investment trends sometimes trade at above trend valuation levels.  We try and avoid this by focusing on valuation levels when constructing client portfolios.

These dynamic trends are reviewed and updated on a periodic basis to capture the fact that the world is constantly changing.  In terms of the Morningstar style box, this is more of a growth-oriented strategy.  However, when constructing client investment portfolios, we will always have some diversification across different sectors of the market since we are agnostic to market capitalization. If the best way to play a theme is a mid-cap, small-cap or foreign-domiciled company, we have no reservation including that security in our portfolios. 

It all comes down to identifying global market themes that are likely to generate attractive growth over the next several years and then picking individual stocks that capture those trends within diversified investment portfolios.

We are not seeking to speculate and identify themes before everyone else, but rather, our goal is to participate in established trends that we believe are likely to endure for an extended period of time.

Washington Trust Wealth Management® is a registered trademark of The Washington Trust Company, which has licensed its use to its parent, affiliates, and subsidiaries, including Washington Trust Advisors, Inc. Investment products are offered through Washington Trust Wealth Management. Non-deposit investment products are: Not deposits; Not FDIC insured; Not insured by any federal government agency; Not guaranteed by the Bank; May go down in value. 

This material is presented solely for informational purposes, and nothing herein constitutes investment, legal, accounting, actuarial or tax advice. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon and is not, and does not constitute, a public or retail offer. It is important to remember that investing entails risk.