Thematic Indices: Looking at the Past or the Future?

Actually, both.

April 2022. Reading Time: 10 Minutes. Author: Nicolas Rabener.

SUMMARY

  • Thematic indices from MSCI have outperformed their benchmark since 2018
  • However, they have a rather unattractive factor mix
  • Going against decades of research is not a sound investment strategy

INTRODUCTION

Although much of the future is uncertain, some technological innovations are rather certain. At some point, we will all have self-driving cars, robots that help us with daily chores, can travel to space, and have artificial intelligence assist us in our jobs and lives.

It is more a question of when rather than if. However, timing is investors’ primary risk when making specific bets on technology and human evolution, compared to passive index investing. Elon Musk’s SpaceX has revolutionized the space industry and created an entire ecosystem of startups dedicated to this space (pun intended).

However, there was a similar boom in the 1970s, when NASA intended to build a 10,000 orbiting community. Unfortunately, none of these ambitions were realized and a cottage industry collapsed.

Today, investors can cost-efficiently take bets on technologies via thematic ETFs from boutique and well-known index providers. MSCI, one of the largest index providers, offers nine indices that provide exposure to themes like the ageing society and future mobility. In this research note, we will analyze these nine thematic indices (read Thematic Investing: Thematically Wrong?).

PERFORMANCE OF THEMATIC ETFS

MSCI launched nine thematic indices in 2018, so these have approximately four years of track record. Stocks are selected from the ACWI universe, which is comprised of more than 90,000 stocks from developed and emerging markets. The stocks are chosen based on their market capitalization and their relevance score that measures the importance of a theme to the company’s business.

We observe that in the period from April 2018 to March 2022, eight of the thematic indices outperformed the benchmark ACWI index. The theme that has not aged well is the one dedicated to the ageing society (pun intended).