Why Thematic Investors Need More Than One Story

Thematic investing lets investors target long-term structural shifts, such as how the world generates energy, spends on defense or extracts scarce resources. These trends often play out over decades, and one typically dominates the investment narrative of the day. That’s artificial intelligence (AI) today, with others carrying relatively little weight.

But a theme’s popularity can encourage you to own too much of it. This often doubles up on an already high weighting in apparently well-diversified global equity indices: for instance, the big US tech stocks leading the AI revolution account for an extraordinarily high level of today’s indices.

Our research shows that backing single exciting stories is not always the wisest option. Holding a few more themes dampens volatility, which can help preserve returns over time.

But why is this? And how many themes does it take to smooth your investment ride?

The Pitfall: Betting on One Story

Most investors come to themes through a story they know well: a technology they use, a trend in the news, an equity sector that has performed well recently. You gain conviction around what is familiar, so allocations often end up built on one or two themes rather than a planned, broader mix.

There is some logic to this. It’s true that some themes turn out to be home runs, and holding one winner beats any mix. But it’s hard to know in advance which the winning theme will be; in other words how it will perform. What’s far easier to predict, as it’s reasonably consistent, is a theme’s volatility, or how the stock prices or stock indices that represent it move from day to day.

Showing the pitfalls of betting on one story, or one theme, our analysis shows that over the past five years the typical single theme had an annual volatility of around 24%. That’s considerably more than the MSCI World Index at around 14%¹.

Volatility: The Forgotten Cost

Think of volatility as a measure of how bumpy your investment ride is. What is often forgotten is that it also eats into returns, because a loss weighs more than a seemingly equal gain. After a 50% fall, for instance, an investment needs to rise 100% just to regain its original value.

The chart below shows three hypothetical investments with the same average annual return, differing only in their volatility. For reference, we include a theoretical investment with no volatility at all — in reality an impossibility — represented by the steady line. The volatility of each path is based on our analysis of a typical single theme and a typical combination of eight themes. After 20 years, the value of an investment in a diversified combination of eight themes ends almost 30% higher than the single theme. Why? Simply because it bears less of the corrosive cost of volatility.

Same Average Return, Different Outcomes

Growth of 100 Over 20 Years, Three Hypothetical Investments Each Averaging 8% a Year

Source: Bloomberg, VanEck calculations. Hypothetical illustration, not based on actual returns and not representing any VanEck product. All three paths have the same arithmetic average return of 8% a year in nominal terms and differ only in volatility. Returns alternate between up and down years: +25.5% and −9.5% for the eight-theme path, +32.3% and −16.3% for the single-theme path. The volatility levels of 17.5% and 24.3% are the median annualized volatility of eight and of one equal-weighted theme(s) in VanEck’s analysis of 20 thematic and hard-asset indices (gross total returns in EUR, 29 October 2021 to 30 October 2026). Past performance does not predict future returns.

Which theme will lead in terms of performance is hard to predict. What you can predict with some certainty is that a single theme will be more volatile than a combination of themes. Unlike picking the winner, reducing volatility is something investors can actually influence.

How Many Themes?

It takes just a few themes to dampen volatility, to smooth your ride. To see how many, we analyzed every possible combination of up to 20 thematic and hard-asset investments over the past five years, with the themes in each combination equally weighted and rebalanced monthly. The chart below shows how overall volatility falls as more themes are added.

Most of the Volatility Reduction Comes From the First Seven to Eight Themes

Median annualised volatility by number of themes, equal-weighted, Oct 2021 to Oct 2026

Source: Bloomberg, VanEck calculations. Based on the indices tracked by 20 VanEck thematic and hard-asset equity ETFs; gross total returns in EUR. For each number of ETFs, all possible equal-weighted combinations are analyzed, rebalanced monthly. Volatility is the annualized standard deviation of daily returns from 29 October 2021 to 30 October 2026 (from 31 December 2021 for combinations including one of the two indices with a later inception date); the chart shows the median for each number of ETFs. Volatility falls from 24.3% with one ETF to 17.5% with eight and 17.1% with all twenty; eight ETFs capture about 94% of the total reduction. Medians for the highest numbers rest on few combinations. Index returns do not reflect fund costs. Past performance does not predict future returns. Hypothetical portfolios that do not represent any VanEck product.

Your first additional themes make a big difference. Owning two themes instead of one already delivers about half of the total reduction in volatility, and three themes more than two thirds of it. After that, the incremental improvement with each extra theme steadily diminishes. Having seven to eight themes cuts volatility from 24.3% for a single theme down to 17.5%. Holding all 20 themes only lowers volatility a little more, to 17.1%.

How much this matters for a whole portfolio depends on how much of it is in themes. With a small thematic allocation, a broad, well-diversified core dominates overall risk, so the number of themes has less effect on the portfolio as a whole. The thematic part itself, however, remains just as concentrated.

Count Return Drivers, Not Themes

The number of themes, though, is only half the story. That is because apparently different thematic investments can have similar performance drivers.

Today that matters as much as ever. The ten largest US companies made up around 41% of the S&P 500 Index in 2025, up from about 19% in 1988, and many are closely involved in AI². A global index is no escape: the weight of the Americas, overwhelmingly the US, in the MSCI World rose from about 32% in 1988 to around 75% in 2025³.

One way to address this is to look at what drives each theme’s returns. For example, semiconductors depend largely on AI and technology investment, defense and space on government budgets, mining and energy on commodity prices, and gold on real interest rates and demand for safe havens.

Some links are less obvious. Electrification and power infrastructure looks like an energy theme, but part of its recent growth comes from the electricity demand of AI data centers.

What This Means

At a time when equity markets are highly concentrated on the theme of AI, our analysis suggests that combining several themes can significantly reduce volatility, and that spreading them across different drivers may strengthen that effect. In our analysis, seven to eight themes delivered most of the reduction in volatility. But numbers alone may not be enough: themes that respond to the same driver add little to one another. Equal weighting and rebalancing can help keep any single theme from dominating, and themes tend to work best as a complement to a broad core rather than a replacement for it.

A single theme expresses one conviction. A diversified set of themes turns several convictions into a more balanced portfolio, with a better chance of achieving your performance goals over time.

This article is for information purposes only and does not constitute investment advice. The themes mentioned are examples used to illustrate the analysis and are not a recommendation to buy or sell any investment.