In today’s market environment with a wide range product offerings, even retail investors have an array of options to diversify their portfolios or to enhance their return profile. Two popular choices are themed and sector-based products. While both types of investment products aim to capture growth in specific areas of the overall market, their investment focus and approach differ significantly. Understanding these differences can help investors choose the right product to reach their financial goals.
Sector-based products
Sector-based products concentrate their investments on specific industries or sectors of the economy such as technology, healthcare, energy, or finance. These funds track the performance of companies operating exclusively within the defined sector, allowing investors to capitalize on growth trends or resilience in that industry.
For example, a healthcare product might include pharmaceutical companies, biotechnology firms, and healthcare equipment manufacturers. Similarly, a technology product may focus on companies specializing in software, hardware, or semiconductors.
Generally speaking, sector products are tied to broader economic cycles and are influenced by macroeconomic factors, such as interest rates or commodity prices. Investors often use these funds to gain targeted exposure to a specific area of the market which they believe will outperform. In addition to this, some investors use the exposure to a specific sector as a hedge against a potential downturn in another sector.
Themed products
Conversely, themed products take a broader, more conceptual approach. Instead of focusing on a single industry, they align their investment strategy with overarching themes or trends that cut across multiple sectors. These themes may include areas such as artificial intelligence, clean energy, e-commerce, electric vehicles, or the aging population.
A clean energy-themed product may invest in solar energy companies, manufacturers of carbon dioxide filter and storage systems, or firms producing energy-efficient technologies. This means the themed product is investing in various sectors such as utilities, technology, and industrials in the example above.
Even as themed products may have a very appealing short-term performance, they are designed to capture long-term, transformative trends rather than short-term economic cycles. With regard to this, themed products might be used by investors who want to align their portfolios with future-focused growth opportunities or personal values such as environmental sustainability or technological innovation.
There is no free lunch – Higher returns come with higher risks
Even as it sounds like a simple exercise for investors to generate additional returns with the usage of themed or sector products, one needs to bear in mind that these kinds of products generally carry higher risks compared to equity funds which invest in broad markets. The main driver of this risk is the fact that these products are inherently less diversified compared to plain vanilla equity funds, as they concentrate on specific industries or themes. This focus makes them more susceptible to volatility and sector-specific downturns. For example, a sector product tied to energy could suffer significant losses during periods of declining oil prices, while a themed fund focused on clean energy might underperform if regulatory support for green initiatives wanes. Additionally, themed products often invest in emerging trends that are speculative by nature, amplifying the risk of underperformance.
With regard to this, investors should carefully assess their risk tolerance and ensure these products complement broader, more diversified holdings within their portfolios. Investors need to bear in mind that themed and sector products may offer potential for higher returns. They also demand greater diligence and an appetite for volatility.
Summary
While sector products are defined by industry classifications, themed products are more dynamic, transcending traditional sector boundaries. That said, sector products are generally more established and stable, while themed products often focus on emerging trends and may carry higher risk due to the speculative nature of these trends. This means that sector or themed products are not an optimal choice for investors with a low risk bearing capacity and/or risk tolerance, even as these investors may have an interest in specific industries or global trends. Understanding the distinctions between these two product types and plain vanilla products ensures more informed investment decisions.
Ultimately, it can be said that the question if and in which proportion an investor should use themed and/or sector products depends on the overall investment strategy and time frame, as well as the risk bearing capacity and tolerance of the investor.
This article is for information purposes only and does not constitute any investment advice.
The views expressed are the views of the author, not necessarily those of LSEG Lipper or LSEG.
