Factor Exposures of Thematic Indices

The improvement in collective human knowledge and technological progress brings many changes in our society. Numerous new businesses are emerging related to autonomous traffic, clean energy, biotechnology, etc. Without any doubt, these new companies are promising and at least the technology behind them seems to be the future. Perhaps the futuristic vision makes these companies so popular among investors.

Moreover, this novel trend is also supported by the most prominent index creators S&P and MSCI. Both providers have created numerous thematic indexes connected to these hot industries. The popularity has caused that ETFs are nowhere behind, and as a result, these thematic indexes could be easily tracked. However, popularity itself does not guarantee the best investment, and we should be interested in these indexes in greater detail. A vital insight provides the novel research paper of Blitz (2021). The findings are interesting — the thematic investors bet against quantitative investors or, more precisely, against the most common factors that are well-known from the asset pricing models. The indexes have large market betas, large negative exposure to both value and profitability factors, and are more volatile than the market. To sum it up, thematic indexes bet against stocks that are currently cheap and profitable or, in other words, against “quants”.


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