Thematic approaches to building indices can be paired with factor approaches to deliver stronger risk-adjusted performance for investors’ portfolios, according to analysis from digital wealth management solutions firm, Quantifeed.
Quantifeed’s whitepaper by senior quantitative strategist, Gaudi Schneider, analysis found while the two approaches to building indices, thematic indices and factor indices, had individual advantages, they produced best results in tandem.
“The thematic and factor approaches to building indices have their own individual advantages for digital wealth management services. However… we believe that through a calculated combination of both, financial institutions can deliver a much better risk-adjusted performance,” Schneider said.
While thematic indices were based on investment themes, factor indices used volatility, size, yield, and momentum as quantitative variables in its growth strategy.
“Mass affluent consumers in Asia-Pacific who are receiving wealth management online can truly benefit from a quantitative overlay to their portfolios,” he said.
“Financial institutions, on the other hand, can also capture the opportunity of digital wealth management services not only by servicing this segment of clients remotely, but also by delivering to them an enhanced portfolio performance.
“Taking advantage of this phenomenon can be achieved by giving stocks with low volatility a greater weight in the portfolio.”