Chapter 1 : Index construction
Designing thematic indices : Why experience and research are essential
Not all thematic indices are created equal
Author : Joshua Kaplan
If you are reading this article , you are hardwired as an investor . Whether tuned into the latest hot product trends , economic news , or world events , you are probably always thinking , “ How can I capitalise on this ?” This type of instinctual approach to investing has a name — it is called top-down analysis . Historically , capturing investment thesis involved connecting the dots from trend to individual securities . Most top-down investors are comfortable identifying a handful of companies but arriving at the optimal opportunity set is elusive and requires an intense research process that could unlock additional value and returns .
Thankfully , thematic indexing is a relatively new tool in the top-down investor ’ s toolbox . If properly constructed and deployed , it allows portfolio managers to achieve targeted , yet diversified , exposures that correspond with their views .
For instance , soaring inflation and supply chain shortages — especially in the semiconductor space — can be felt acutely across the world today . A common way to profit off inflation in the financial markets is to invest in commodities such as metals . So you could buy Newmont Mining Corporation or Cleveland-Cliffs , or perhaps even invest in the S & P Metals & Mining Select Industry index , which was up roughly 55 % for the year , as at 31 March . Compared to the MSCI All Country World index of global stocks , which was up only 5.5 %, this represented a substantial outperformance that would have yielded profitable results .
However , taking this theme a step further might lead toward a more targeted , thematic exposure within the overall
metals and mining complex , homing in on those that are in the shortest supply or highest demand such as lithium , nickel and titanium . The MVIS Global Rare Earth / Strategic Metals index , which specifically and exclusively covers miners of such metals , was up roughly 71 % over the same period .
For another tangible example , consider the 2020 US election season , where more investors expected increased government spending on national infrastructure and clean-energy initiatives . Some of the industries that stood to benefit were clean energy , electric vehicles , engineering and construction , building materials and communications infrastructure . Unfortunately , there are no standard industry
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