As interest in growth stocks re-emerges, an investment approach is gaining traction once again: thematic investing. Thematic or exchange-traded funds are often tied to growth themes such as technology and green energy. But after growth stocks tumbled this year, with investors turning to value amid a risk-on economic backdrop, thematic funds are also seeing cash outflows. However, in a note in late July, Citi US Equity Strategist Scott Chronert said the bank has seen flows return to a “growth-biased theme”. He added: “From here, we expect thematic ETF flows to improve as investors seek to differentiate their portfolios after focusing on macro risk and broader risk in most cases. this year”. ‘Attractive Alternative’ And Citi is not alone. Morningstar, in a recent report, said thematic funds now offer an “attractive alternative” to some investors. “We are of the view that if done properly, exposure to thematic investments can position investors towards blue chips in the future,” it added. Thematic funds now account for 2.1% of total equity, up from 0.6% a few years ago, according to Morningstar. Here’s how to invest in thematic funds right now, according to Citi and Morningstar. Equal-weighted funds Investors should consider allocating 10% to 20% of their portfolios to specialty funds, which “have a tremendous capacity to enhance portfolio results.” fourth”, according to Morningstar. Look for equal-weight funds, the company says, with the same weighting for each share in the fund. The equally weighted thematic index “always generates better returns”, with a compound annual growth rate of 7.48%, compared with 6.28% for the Morningstar Global Markets Index. According to Morningstar, if investors choose funds with themes like digital economy or cloud computing, that number will increase to 9.48% and 8.5%, respectively. It says: “We can see that the equally weighted topic factor consistently generates better returns, while warning that certain topics will experience more volatility. According to Citi. The bank thinks exposure to both dirty and clean energy, which also ranks among their top topics for investment, may be better than focusing on just one. For many years, investors have viewed energy “as a commercial” or/or “:” they are either oriented towards the long-term renewable energy trend or focused on the short-term needs that companies have. Traditional energy companies respond, says Chronot. “We no longer believe that to be the case as more and more investors, including ESG-focused institutions, recognize the need to manage the energy transition,” he wrote. “Therefore, from a thematic perspective, exposure to fossil fuels and Clean Energy makes sense at this stage.” Avoid the mega-caps? Morningstar also says that thematic portfolio should include fewer large-cap companies. This may seem counter-intuitive, as investors typically expect large-cap companies to provide more stability during volatile times. But Morningstar points out that in the long run, they may not beat smaller, more efficient companies focused on growth. Companies that diversify widely are often “worth less than the sum of their parts,” it added. “There is a large body of evidence that shares of specialized companies outperform stocks of large, diversified companies over the long term,” its analysts wrote. However, Morningstar cautions that investors should not hold thematic funds for long periods of time to reap maximum value. “Thematically intensive strategies should be periodically rebalanced, and investors should expect a holding period of three years,” it added.