Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 406

Making a positive impact with thematic investing

Last week I read an interesting piece by someone who clearly was not a fan of thematic investing. 

He demonstrated the dangers of jumping on the ‘next big thing’, pointing out, for example, the risks early investors in the automobile faced. The Duryea Motor Wagon Company, the first U.S. car maker, was founded in 1895. Over the next 25 years, 436 car manufacturers came into existence, but 30 years later, almost all had fallen by the wayside as the big three of General Motors, Chrysler and Ford emerged.

More recently, those who committed their hard-earned cash to the online shopping phenomenon via Amazon have been rewarded handsomely, but it’s easy to forget spectacular failures such as etoys.com, Pets.com, Boo.com, which didn’t turn out so happily for investors.

The writer’s conclusion? “Thematic leaps do not axiomatically line the pockets of those willing to finance them.”

Maybe so. But does this mean we should abandon the attempt to profit from trends that have the potential to change the world? Or simply, is it that we need to be smart in how we go about it?

What is thematic investing?

Thematic investors try to identify long-term transformational trends, and the investments that are likely to benefit if those trends play out. Such investments are typically agnostic to industry sectors, or geographical boundaries.

Thematic investing focuses on structural, rather than cyclical trends. These are themes that tend to be one-off shifts that irreversibly change the world, driven by powerful forces such as disruptive technologies or changing demographics and consumer behaviour. By contrast, cyclical themes are typically short- to medium-term, and tend to revert.

An example of structural change is the emergence of e-commerce, which has fundamentally shifted the way goods and services are bought and sold. Another good example is the rise and rise of cybersecurity, which is increasingly becoming a critical threshold component of all technology solutions as more and more of our world goes online.

How can I invest thematically?

Here’s where it gets trickier.

The writer I referred to earlier is right - picking winners is notoriously difficult. For every Amazon or Netflix, there are hundreds, even thousands, of companies trying to exploit the same opportunities, but fail.

For this reason, there are benefits to gaining exposure to a theme in a different way, one that is not an ‘all or nothing’ gamble.

Thematic ETFs take this approach. They typically aim to track an index that measures the performance of a range of companies that have the potential to benefit if the theme plays out. And, like thematic investing more generally, they are typically sector and country agnostic. Diversified exposure means that the inevitable failure of some of these companies will have less of an impact. The hope is that some, or many, will succeed, and that overall the portfolio of companies will increase in value.

…. and when?

As important as the how, is the when.

One model proposes that disruptive technologies, products and ideas typically follow an ‘S’ shaped adoption curve with five stages. The chart below shows the growth, and rate of growth, at each stage.

Source: Jay Jacobs, ‘Investing in Tomorrow – A Whitepaper on Thematic Investing’, Global X

The timing of an investment is largely a trade-off between upside potential and risk.

Investing right at the start of adoption has the highest potential reward but also involves the greatest risk, as the trend is far from established, and there is a high possibility of failure.

Waiting until the later stages involves far less risk, as the theme is well-established. However, the potential rewards will also be less, as the successful progression of the theme will already be reflected in the prices of the investments being considered.

What theme might be in the sweet spot right now?

In 2021, what is a theme that fits the criterion of a ‘one-off shift that irreversibly changes the world, that is long-term in nature, and driven by powerful forces such as disruptive technologies or human behaviour’? One that is neither at the earliest stages, nor has reached maturity.

While we believe there are a few, the candidate we’re focusing on today is climate change.

Global warming is one of the defining challenges of the 21st century. Unaddressed, it will have a catastrophic impact on our planet and the lives of future generations. Many would argue the catastrophe is already unfolding.

Given the dimensions of the challenge, the size of the response and the amount of money needed to be spent on it is correspondingly large.

The United Nations Intergovernmental Panel on Climate Change (IPCC) estimates that to contain the rise in global temperatures to 1.5-2°C above pre-industrial levels by 2100 would require a halving in the level of greenhouse gas emissions (GGE) currently projected by 2050 under the current 2016 Paris Climate Agreement.

Energy currently accounts for around two thirds of global GGE. Global energy producer BP estimates that to achieve the extra GGE cuts suggested by the IPCC would require a 10-fold increase by 2050 in the share of energy derived from renewables - or from around 5% in 2018 to between 40 to 60%.

Meanwhile, the Energy Transitions Committee (ETC), a global organisation of energy producers, financial institutions and environmental groups, believes it is possible to create a prosperous net-zero-emissions economy by mid-century, in which case global warming would be limited to the lower bounds of the Paris Agreement’s target range.

The ETC estimates that the additional investment required to achieve a zero carbon-emissions economy by 2050 will be US$1-2 trillion per annum.

The deep cuts to emissions that will be required to limit global warming call for innovation on a range of climate and environmentally friendly activities. Investors wanting comprehensive access to this thematic are likely to want an investment that provides exposure to a broad range of solutions, including clean energy, electric vehicles, energy efficiency technologies, sustainable food, water efficiency and pollution control.

 

Richard Montgomery is the Marketing Communications Manager at BetaShares, a sponsor of Firstlinks. This article is for general information purposes only and does not address the needs of any individual. Past performance is not indicative of future performance. Investment value can go down as well as up.

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

To tap into the long-term growth potential of this theme, BetaShares has launched the Climate Change Innovation ETF (ERTH).

 

  •   5 May 2021
  •      
  •   

 

Leave a Comment:

RELATED ARTICLES

30 ETFs in one ecosystem but is there a favourite?

The role of sustainability in private markets

Thematic ETFs: is the juice worth the squeeze?

banner

Most viewed in recent weeks

Australia's retirement system works brilliantly for some - but not all

The superannuation system has succeeded brilliantly at what it was designed to do: accumulate wealth during working lives. The next challenge is meeting members’ diverse needs in retirement. 

Australian stocks will crush housing over the next decade, 2025 edition

Two years ago, I wrote an article suggesting that the odds favoured ASX shares easily outperforming residential property over the next decade. Here’s an update on where things stand today.

Get set for a bumpy 2026

At this time last year, I forecast that 2025 would likely be a positive year given strong economic prospects and disinflation. The outlook for this year is less clear cut and here is what investors should do.

The 3 biggest residential property myths

I am a professional real estate investor who hears a lot of opinions rather than facts from so-called experts on the topic of property. Here are the largest myths when it comes to Australia’s biggest asset class.

AFIC on the speculative ASX boom, opportunities, and LIC discounts

In an interview with Firstlinks, CEO Mark Freeman discusses how speculative ASX stocks have crushed blue chips this year, companies he likes now, and why he’s confident AFIC’s NTA discount will close.

Property versus shares - a practical guide for investors

I’ve been comparing property and shares for decades and while both have their place, the differences are stark. When tax, costs, and liquidity are weighed, property looks less compelling than its reputation suggests.

Latest Updates

Superannuation

Meg on SMSFs: First glimpse of revised Division 296 tax

Treasury has released draft legislation for a new version of the controversial $3 million super tax. It's a significant improvement on the original proposal but there are some stings in the tail.

Investment strategies

10 fearless forecasts for 2026

The predictions include dividends will outstrip growth as a source of Australian equity returns, US market performance will be underwhelming, while US government bonds will beat gold.

Infrastructure

How many hospitals will an extra 1 million people need?

We're about to add another million people to cities like Brisbane, Sydney, and Melbourne. How many hospitals and other essential infrastructure are needed to cater to a million more people? This breaks down the numbers.

Risk management

Is the world's safest currency actually the riskiest?

The US dollar’s long-standing role as a ‘shock absorber’ during times of market stress is showing cracks. The ‘Liberation Day’ sell-off was a timely reminder of this, and here's what investors should do about it.

10 things I learned about dementia and care homes from close range

My mother developed dementia before eventually dying in June last year. She was in three aged care homes before finding the right one. Here is what I learned along the way.

Economics

China's EV and solar backlog and future trade wars

China has flooded the world with electric cars and solar panels to offset the economic drag from a weak domestic property market. How long can this go on, and what are the implications for commodities and Australia?

Investment strategies

Why Elon Musk's pay packet is justified

Tesla copped criticism after its shareholders approved a package allowing Musk to earn up to $1 trillion in stock options. If only Australian businesses were more like Tesla.

Sponsors

Alliances

© 2026 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.