The proliferation of thematic indexes came on the heels of the 2008/2009 global financial crisis, and is a relatively new phenomenon in the investment industry. The economic trends undergirding the current bear market is different than what we have seen in the last 14 years and presents the first real test to this segment of the index and ETF market. What is important to know is that while thematic indexing is new, thematic investing is a long-standing approach to both asset allocation and stock-picking that is closely associated with a top-down analysis approach.
Now that the tide is coming in, we are seeing investors discover other types of thematic indexes more appropriate for today’s market such as those that are linked to asset classes that do well in inflationary environments or during supply chain disruptions. As thematic indexes move through their first true economic cycle, the breadth of these indexes will grow and this approach to investing and indexing will only become more entrenched.
In the end the long-term value proposition of thematic indexes is that they offer the top-down investor a new tool to act on their analysis with precision regardless of whether the investor is seeking to capitalize on short or long-term trends, or whether their analysis is focused on economic or hot technological trends.
But in order for thematic indexes to really work for investors, they must be designed and constructed properly. In this light, index providers are no longer simply providers of benchmarks but are an integral part of the investment process. This topic is explored in some more detail in an article published in ETF Stream’s inaugural edition of “Thematics Unlocked”.
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