Thematic macro-trend investing is on the rise.
These are good times for thematic indexes. “The ETF industry is seeing explosive growth in terms of both AUM and launches, thanks [in part] to the rise in ‘thematic investing,’” noted Nasdaq recently.
MSCI, for instance, recently announced five new thematic indexes tied to long-term megatrends widely expected to impact society in the future: smart cities, the digital economy, future mobility, disruptive technology and millennials.
These new indexes typically use natural language processing (NLP) to identify companies poised to profit from long-term, structural trends. “NLP helps us capture the key concepts, products and services that companies offer,” Stuart Doole, MSCI’s global head of Index New Product Development Research, tells Global Finance.
MSCI’s Millennial Index is comprised of companies that derive significant revenue from targeting the preferences of the “millennial” generation, those born between 1981 and 1996. This group generally distrusts advertising, preferring consumer reviews to inform their purchases, for instance. The Millennials Index includes companies in health, fitness, travel, leisure, social media, entertainment, financial services, and more.
The firm’s Disruptive Technologies Index includes companies involved with the Internet of Things, cloud computing, fintech, digital payments, healthcare innovation, robotics, cybersecurity, clean energy and smart grids.
Developing a new index typically begins with a few seed words like “new generation” or “new technology” taken from the index objective, says Doole. From these seed words the firm generates as many as 200 to 300 keywords and phrases (e.g., organic food) which are then tallied in company documents and reports. How many times does a 10-K report mention “social media,” for instance? If the total is high, that company may find its way into MSCI’s Millennial Index.
New themes seem to be introduced all the time. In July, Tematica Research launched a Cleaner Living Index that focuses on companies poised to benefit from “the growing demand for items that are better for you and the planet,” like fresh produce or solar technologies.