Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 302

Thematic exposure to global trends using ASX

Good share market returns require identifying companies likely to produce healthy earnings and dividends over time. Investors traditionally have had the choice of active managers attempting to pick winners, or passive managers taking a rules-based approach, such as investing in companies that meet criteria relating to price momentum, valuations or financial metrics, or the overall index.

The problem with many of these approaches is that the choice can be governed by short-run – or cyclical – dynamics. Deciding which part of the cycle we’re in, and which companies will do well in that part of the cycle, is no easy task.

Thematic investing offers an alternative approach, embracing the cost and diversification benefits of passive investing but with a rules-based strategy to identify companies with the potential to benefit from predictable, longer-run structural changes.

What is thematic investing?

The goal of thematic investing is to identify megatrends and enduring structural forces that will affect the economy over time, and then position one’s portfolio to benefit from those forces, irrespective of the ups and downs of current or future economic cycles.

The table below summarises the differences between thematic investing and approaches relying on identifying and positioning for short-run economic cycles.


Thematic or secular investingCyclical investing
Investment FocusMegatrends: disruptive technologies, demographic changesGeographic regions, sectors of the economy, factors such as momentum, value, quality, volatility
Type of change focused onStructuralCyclical
Investment horizonLong termShort-mid term
Timing considerationsEntry and exit timing less importantEntry and exit timing important
Illustrative size of portfolioSmaller universe of securitiesLarger universe of securities


Advantages of thematic investing

A primary benefit of longer-term investment approaches like thematic investing is that the timing of entry and exit points is typically less crucial than with more cyclically-sensitive investment strategies.

As seen in the table below, the rate of adoption of major technology changes over the past century – such as the telephone, electricity, cars and radio – has been measured in decades.  The pace of technological innovation is unrelenting, with more recent changes such as the internet, smart phones and social media just as disruptive, and take-up more rapid.

Adoption of technology in the US (1990 to the present)

Source: Asymco, BlackRock

Other megatrends likely to be sustained over coming decades include:

 

  • global population ageing

 

 

  • climate change and the demand for clean energy

 

 

  • Asia’s rising middle class

 

 

  • adoption of robotics, and

 

 

  • the increasing threat of cybercrime.

 

 

Thematic investing can improve portfolio diversification, as returns are likely to have low correlation to swings in major regional or sector investment benchmarks.

Thematic investing readily lends itself to a globally diversified passive approach – using rules to identify companies with revenue exposure to a secular trend, and then investing in a broad selection of the leading players anywhere in the world.

Of course, active managers are also able to take a thematic approach to investing. However, they are likely to face just as many challenges ‘picking winners’ from secular change as they currently do in picking winners from cyclical change.

One of the benefits of a passive market capitalisation indexing approach is that it tends to increase portfolio weightings to emerging ‘winners’ with rising market cap over time, while cutting exposure to ‘losers’ with declining market cap. In dynamic forward-looking markets of the type that lend themselves to thematic investing, the market, on average, has demonstrated a tendency to get it right over time with prices (or market capitalisation) leading fundamentals such as actual revenues and earnings.

Thematic investing is an approach that resonates with investors, as it taps into economic changes they can see and hear taking place around them every day.  What’s more, many of these megatrends – such as environmental, social, or technology-focused themes – tap into an increasing interest in socially responsible investing.

Megatrend opportunities on the ASX

Thanks to the advent of exchange traded funds (ETFs), it has never been easier for investors to gain diversified, transparent and cost-effective exposure to these major investment themes shaping our world.

 

Don Hoang is an Assistant Portfolio Manager and Ilan Israelstam is Head of Strategy at BetaShares, a sponsor of Cuffelinks. BetaShares offers a wide range of thematic ETFs. This article is for general information purposes only and does not address the needs of any individual.

For more articles and papers from BetaShares, please click here.

 

RELATED ARTICLES

$100 billion! Five reasons investors are flocking to ETFs

Global ETFs: insights into a multi-trillion-dollar industry

Will ETF liquidity be there when I need it?

banner

Most viewed in recent weeks

The case for the $3 million super tax

The Government's proposed tax has copped a lot of flack though I think it's a reasonable approach to improve the long-term sustainability of superannuation and the retirement income system. Here’s why.

7 examples of how the new super tax will be calculated

You've no doubt heard about Division 296. These case studies show what people at various levels above the $3 million threshold might need to pay the ATO, with examples ranging from under $500 to more than $35,000.

The revolt against Baby Boomer wealth

The $3m super tax could be put down to the Government needing money and the wealthy being easy targets. It’s deeper than that though and this looks at the factors behind the policy and why more taxes on the wealthy are coming.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

The super tax and the defined benefits scandal

Australia's superannuation inequities date back to poor decisions made by Parliament two decades ago. If super for the wealthy needs resetting, so too does the defined benefits schemes for our public servants.

Are franking credits hurting Australia’s economy?

Business investment and per capita GDP have languished over the past decade and the Labor Government is conducting inquiries to find out why. Franking credits should be part of the debate about our stalling economy.

Latest Updates

Superannuation

Here's what should replace the $3 million super tax

With Div. 296 looming, is there a smarter way to tax superannuation? This proposes a fairer, income-linked alternative that respects compounding, ensures predictability, and avoids taxing unrealised capital gains. 

Superannuation

Less than 1% of wealthy families will struggle to pay super tax: study

An ANU study has found that families with at least one super balance over $3 million have average wealth exceeding $19 million - suggesting most are well placed to absorb taxes on unrealised capital gains.   

Superannuation

Are SMSFs getting too much of a free ride?

SMSFs have managed to match, or even outperform, larger super funds despite adopting more conservative investment strategies. This looks at how they've done it - and the potential policy implications.  

Property

A developer's take on Australia's housing issues

Stockland’s development chief discusses supply constraints, government initiatives and the impact of Japanese-owned homebuilders on the industry. He also talks of green shoots in a troubled property market.

Economy

Lessons from 100 years of growing US debt

As the US debt ceiling looms, the usual warnings about a potential crash in bond and equity markets have started to appear. Investors can take confidence from history but should keep an eye on two main indicators.

Investment strategies

Investors might be paying too much for familiarity

US mega-cap tech stocks have dominated recent returns - but is familiarity distorting judgement? Like the Monty Hall problem, investing success often comes from switching when it feels hardest to do so.

Latest from Morningstar

A winning investment strategy sitting right under your nose

How does a strategy built around systematically buying-and-holding a basket of the market's biggest losers perform? It turns out pretty well, so why don't more investors do it?

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.