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Naïve diversification in thematic investing: heuristics for the core satellite investor

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Abstract

In recent years, thematic exchange-traded funds (ETF) have given core satellite strategies a new impetus. Thematic investing attempts to participate in certain trends, or to serve any conceivable subjective interest such as ethics and sustainability by supplementing the corresponding ETFs to conventional ones. Hence, the question arises how to weight the thematic satellite in relation to the diversified core portfolio. Complex research and factor models are hardly suitable for private investors, and the short history of thematic products would not provide reliable information anyway. Therefore, this study develops naïve diversification for thematic core satellite investors and provides three heuristics. The first strategies focus on portfolio and stock amounts; the later considers minimum concentration as an allocation rule based on the Herfindahl index. The heuristics prove to be useful and competitive to provide diversification regarding volatility of portfolio returns compared to a minimum variance optimization in out-of-sample tests. Hence, this study offers some pragmatic and truly practical aid for thematic investors.

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Notes

  1. Talmud-Bava Metzia 42a.

  2. DAX30, DJ Global Titans 50, FTSE 100, Global Dow, Nikkei 225, S&P 500, STOXX600, Russell 1000, MSCI ACWI, MSCI World.

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Authors and Affiliations

  1. Decision Theory and Financial Services, RWTH Aachen University, Templergraben 64, 52062, Aachen, Germany

    Florian Methling & Rüdiger von Nitzsch

Authors
  1. Florian Methling
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  2. Rüdiger von Nitzsch
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Correspondence to Florian Methling.

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Appendix

Appendix

Different time frames

See Tables 10, 11, 12, 13, 14, 15, 16 and 17.

Table 10 Portfolio-based (PBN), stock-based (SBN) and concentration-based naivety (CBN) in comparison with the benchmarks of 99 different invested amounts (99BM) and a minimum variance optimization (MVO)
Full size table
Table 11 Mean yearly volatility approximated from daily volatility with factor √250 of portfolio-based (PBN), stock-based (SBN) and concentration-based naivety (CBN) as well as the 99 benchmark portfolios (99BM) and minimum variance optimization (MVO) portfolios
Full size table
Table 12 Portfolio-based (PBN), stock-based (SBN) and concentration-based naivety (CBN) in comparison with the benchmarks of 99 different invested amounts (99BM) and a minimum variance optimization (MVO)
Full size table
Table 13 Mean yearly volatility approximated from daily volatility with factor √250 of portfolio-based (PBN), stock-based (SBN) and concentration-based naivety (CBN) as well as the 99 benchmark portfolios (99BM) and minimum variance optimization (MVO) portfolios
Full size table
Table 14 Portfolio-based (PBN), stock-based (SBN) and concentration-based naivety (CBN) in comparison with the benchmarks of 99 different invested amounts (99BM) and a minimum variance optimization (MVO)
Full size table
Table 15 Mean yearly volatility approximated from daily volatility with factor √250 of portfolio-based (PBN), stock-based (SBN) and concentration-based naivety (CBN) as well as the 99 benchmark portfolios (99BM) and minimum variance optimization (MVO) portfolios
Full size table
Table 16 Portfolio-based (PBN), stock-based (SBN) and concentration-based naivety (CBN) in comparison with the benchmarks of 99 different invested amounts (99BM) and a minimum variance optimization (MVO)
Full size table
Table 17 Mean yearly volatility approximated from daily volatility with factor √250 of portfolio-based (PBN), stock-based (SBN) and concentration-based naivety (CBN) as well as the 99 benchmark portfolios (99BM) and minimum variance optimization (MVO) portfolios
Full size table

Different thematic families

In the following, the used data set and design are identified by:

t(01.10.2015) = 1, T = 1066, IN = 250, OUT = 500, Delta = 15

See Tables 18, 19, 20, 21, 22, 23, 24 and 25.

Table 18 Portfolio-based (PBN), stock-based (SBN) and concentration-based naivety (CBN) in comparison with the benchmarks of 99 different invested amounts (99BM) and a minimum variance optimization (MVO)
Full size table
Table 19 Mean yearly volatility approximated from daily volatility with factor √250 of portfolio-based (PBN), stock-based (SBN) and concentration-based naivety (CBN), the 99 benchmark portfolios (99BM) and minimum variance optimization (MVO) portfolios
Full size table
Table 20 Portfolio-based (PBN), stock-based (SBN) and concentration-based naivety (CBN) in comparison with the benchmarks of 99 different invested amounts (99BM) and a minimum variance optimization (MVO)
Full size table
Table 21 Mean yearly volatility approximated from daily volatility with factor √250 of portfolio-based (PBN), stock-based (SBN) and concentration-based naivety (CBN), the 99 benchmark portfolios (99BM) and minimum variance optimization (MVO) portfolios
Full size table
Table 22 Portfolio-based (PBN), stock-based (SBN) and concentration-based naivety (CBN) in comparison with the benchmarks of 99 different invested amounts (99BM) and a minimum variance optimization (MVO)
Full size table
Table 23 Mean yearly volatility approximated from daily volatility with factor √250 of portfolio-based (PBN), stock-based (SBN) and concentration-based naivety (CBN), the 99 benchmark portfolios (99BM) and minimum variance optimization (MVO) portfolios
Full size table
Table 24 Portfolio-based (PBN), stock-based (SBN) and concentration-based naivety (CBN) in comparison with the benchmarks of 99 different invested amounts (99BM) and a minimum variance optimization (MVO)
Full size table
Table 25 Mean yearly volatility approximated from daily volatility with factor √250 of portfolio-based (PBN), stock-based (SBN) and concentration-based naivety (CBN), the 99 benchmark portfolios (99BM) and minimum variance optimization (MVO) portfolios
Full size table

Different conventional cores

In the following, the used data set and design are identified by:

t(01.10.2015) = 1, T = 1066, IN = 250, OUT = 500, Delta = 15

See Tables 26, 27, 28, 29, 30 and 31.

Table 26 Portfolio-based (PBN), stock-based (SBN) and concentration-based naivety (CBN) in comparison with the benchmarks of 99 different invested amounts (99BM) and a minimum variance optimization (MVO)
Full size table
Table 27 Mean yearly volatility approximated from daily volatility with factor √250 of portfolio-based (PBN), stock-based (SBN) and concentration-based naivety (CBN) as well as the 99 benchmark portfolios (99BM) and minimum variance optimization (MVO) portfolios
Full size table
Table 28 Portfolio-based (PBN), stock-based (SBN) and concentration-based naivety (CBN) in comparison with the benchmarks of 99 different invested amounts (99BM) and a minimum variance optimization (MVO)
Full size table
Table 29 Mean yearly volatility approximated from daily volatility with factor √250 of portfolio-based (PBN), stock-based (SBN) and concentration-based naivety (CBN) as well as the 99 benchmark portfolios (99BM) and minimum variance optimization (MVO) portfolios
Full size table
Table 30 Portfolio-based (PBN), stock-based (SBN) and concentration-based naivety (CBN) in comparison with the benchmarks of 99 different invested amounts (99BM) and a minimum variance optimization (MVO)
Full size table
Table 31 Mean yearly volatility approximated from daily volatility with factor √250 of portfolio-based (PBN), stock-based (SBN) and concentration-based naivety (CBN) as well as the 99 benchmark portfolios (99BM) and minimum variance optimization (MVO) portfolios
Full size table

Different benchmark

For the following table, the used data set and design are identified by:

t(01.10.2015) = 1, T = 1066, IN = 250, OUT = 500, Delta = 15

See Tables 32 and 33.

Table 32 Portfolio-based (PBN), stock-based (SBN) and concentration-based naivety (CBN) in comparison with the benchmarks of 49 different invested amounts and a minimum variance optimization (MVO)
Full size table
Table 33 Mean yearly volatility approximated from daily volatility with factor √250 of portfolio-based (PBN), stock-based (SBN) and concentration-based naivety (CBN) as well as the variation of 49 benchmark portfolios (49BM) and minimum variance optimization (MVO) portfolios
Full size table

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Methling, F., von Nitzsch, R. Naïve diversification in thematic investing: heuristics for the core satellite investor. J Asset Manag 20, 568–580 (2019). https://doi.org/10.1057/s41260-019-00136-2

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