Betting Against Quant: Examining the Factor Exposures of Thematic Indices
16 Pages Posted: 9 Aug 2021
Date Written: August 5, 2021
We examine the performance characteristics of recently introduced thematic indices using standard asset pricing theory. We find that thematic indices generally have strong negative exposures towards the profitability and value factors, indicating that they hold growth stocks that invest now for future profitability. As such, investors in thematic indices are effectively trading against quant investors, who prefer stocks that are currently cheap and profitable. From an asset pricing perspective, the negative factor exposures of thematic indices imply low expected returns. As there is clearly a clientele for thematic indices, we discuss how investing in these strategies may be rationalized despite their unfavorable factor exposures.
Keywords: Thematic indices, asset pricing, factor exposures, value, growth, profitability, quant investing
JEL Classification: G11, G12, G14
Suggested Citation: Suggested Citation