Betting Against Quant: Examining the Factor Exposures of Thematic Indices

16 Pages Posted: 9 Aug 2021

See all articles by David Blitz

David Blitz

Robeco Quantitative Investments

Date Written: August 5, 2021

Abstract

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

Blitz, David, Betting Against Quant: Examining the Factor Exposures of Thematic Indices (August 5, 2021). Available at SSRN: https://ssrn.com/abstract=3899750 or http://dx.doi.org/10.2139/ssrn.3899750

David Blitz (Contact Author)

Robeco Quantitative Investments ( email )

Weena 850
Rotterdam, 3014 DA
Netherlands

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