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

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  • Florian Methling

    (RWTH Aachen University)

  • Rüdiger Nitzsch

    (RWTH Aachen University)

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.

Suggested Citation

  • Florian Methling & Rüdiger Nitzsch, 2019. "Naïve diversification in thematic investing: heuristics for the core satellite investor," Journal of Asset Management, Palgrave Macmillan, vol. 20(7), pages 568-580, December.
    • Handle: RePEc:pal:assmgt:v:20:y:2019:i:7:d:10.1057_s41260-019-00136-2
    DOI: 10.1057/s41260-019-00136-2
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    References listed on IDEAS

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