or sector indices that capture these expected beneficiaries . Rather , a thematic index reaching across one or more of these industries , such as the BlueStar 5G Communications index or the BlueStar Electric Vehicle Industry index , would have been most appropriate .
Not all thematic indices are created equal , however . The process that index providers use to determine which companies are relevant to which theme can vary greatly and should be considered carefully . As long as this company-to-theme mapping process is treated with the utmost importance , thematic indices or baskets can allow investors to precisely align their portfolios with both timely but transient as well as long-term structural trends .
Building a thematic index
Sorting through tens of thousands of companies to find those that are truly relevant to an investment thesis may not be the best use of time , or an area of expertise , for most investors . Using standardised industry classifications does not help much in many cases , and gathering names from internet searches or sell-side industry reports add biases .
Here enters the index
Chapter 1 : Index construction
Thematic indices should allow any type of investor to act on their analysis with precision
provider as a critical component of the investment process , whether the fully designed index will be used to underlie a product or to help investors find single-stock investments that align with an overall top-down investment thesis . A professionally designed thematic index requires the integration of deep analysis and research into a strict rules-based framework .
Establishing the rules
As index providers become more integral to the investment process , rather than simply providing benchmarks for active managers , it is critically important for indices to offer exposure that are as pure as possible to a given market or segment . Determining the universe of relevant companies is fundamental for constructing and maintaining any index . But before that , unambiguous rules must be set to ensure that the universe will be appropriate for the targeted index exposure . For thematic indices , this is a particularly important — and challenging — task that requires a great deal of research and diligence .
The challenge : How does an index provider sort through tens of thousands of publicly traded companies to capture 100 % of those that meet the universe criteria and 0 % of those that do not ? Some providers choose the path