RT Journal Article
SR Electronic
T1 Betting against Quant: Examining the Factor Exposures of Thematic Indexes
JF The Journal of Index Investing
FD Institutional Investor Journals
SP jii.2021.1.111
DO 10.3905/jii.2021.1.111
A1 David Blitz
YR 2021
UL https://pm-research.com/content/early/2021/10/30/jii.2021.1.111.abstract
AB The performance characteristics of recently introduced thematic indices are examined using standard asset pricing theory. The main finding is that thematic indices generally exhibit strong negative exposures to the profitability and value factors, indicating that they hold growth stocks that invest now for future profitability. As such, investors in thematic indexes are effectively trading against quant investors, who prefer stocks that are currently cheap and profitable. If the negative factor exposures of thematic indexes persist, then from an asset pricing perspective this implies low expected returns. As there is clearly a clientele for thematic indexes, the author discusses how investing in these strategies may be rationalized despite their unfavorable factor exposures.Key Findings▪ Thematic indexes generally exhibit strong negative exposures to profitability and value factors, implying that they trade against quant investors.▪ If the negative factor exposures of thematic indexes persist, then from an asset pricing perspective this implies low expected returns.▪ Possible motivations for investing in thematic indexes are discussed despite their unfavorable factor exposures.