The thematic universe represented here seems to overlap with the concept of what one might designate 'popularity' indices - places where people have high asperations for the future. Many of these areas will be the future but not at these prices and maybe not from these early efforts. This often results in these enterprises being substantially overpriced and subject to dramatic corrections (think early rail roads or internet). In contrast, the 'unpopular' positions that have been underpriced, say a thematic constructed of coal, cigarette, cement, and the like industries may in fact outperform. In a sense, this is somewhat correlated with the 'simplistic' value screens of P/B and P/E but is really more aligned with establishing intrinsic value estimates and a reasonable margin of safety where illogical growth or margin implicit in pricing are exposed as unlikely if not flatly unreasonable.

When the crowd is buying, sell, when the crowd is selling, buy.

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Powerful article! Would be add value to know how much of the variance is explained by the factors? Let's say for example on average of R-square = 20%. Would it be bad, good, or irrelevant to the finding?

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Apr 22, 2022Liked by Joachim Klement

Hi Joachim. Thanks for the analysis.

I would suggest also this paper run on underperformance of thematic ETF: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3765063


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