Disclaimer: Views in this blog do not promote, and are not directly connected to any L&G product or service. Views are from a range of L&G investment professionals, may be specific to an author’s particular investment region or desk, and do not necessarily reflect the views of L&G. For investment professionals only.
Understanding the factor exposures of thematic indices
Ahead of a major research paper to be released later this year, we analyse the factor exposures of thematic indices – and what this means for investors seeking diversification[1].
The following is a short extract from our Q2 2026 ETF outlook: diversify and thrive
Thematic investing targets long-term megatrends shaping the future. It focuses on themes rather than traditional sectors, seeking exposure to companies driving or benefiting from change while avoiding those at risk of disruption.
Because themes cut across sectors and geographies, they can provide access to companies not widely held in traditional equity portfolios, especially mid‑ and small‑cap companies. This provides exposures with naturally low overlap with market‑cap indices.
As a result, systematic thematic strategies can serve as core building blocks, offering diversified, complementary exposure alongside existing equity holdings.
A snapshot of factor exposure across thematic equity
We are examining how thematic investing interacts with factor investing. This research draws on L&G’s in‑house factor scores and our suite of thematic indices.
L&G’s factor strategies adopt a modern, refined approach built on definitions that reflect the realities of today’s market economy. While our style factor definitions remain firmly grounded in academic research, we have incorporated additional features that capture our own investment insights.
You can learn more about our factor framework on our factor webpage, and we have written extensively about factors including Quality, Low Volatility and Value. According to the research paper Factor Exposures of Thematic Indices, thematic indices typically show strong negative exposure to the profitability and value factors. This suggests that they tend to hold growth-oriented stocks that prioritise investment today in anticipation of future profitability.[1]
While innovative, technology-driven themes tend to exhibit a clearer tilt towards the growth and momentum factors currently, themes linked to essential services typically align more closely with quality and value characteristics, given their stable earnings profiles, defensive business models, and consistent cash flow generation.
See our thematic indices below.
Read the full article in our Q2 2026 ETF outlook: diversify and thrive
[1] It should be noted that diversification is no guarantee against a loss in a declining market
[2] Blitz, David, Betting Against Quant: Examining the Factor Exposures of Thematic Indices (August 5, 2021).
Recommended content for you
Learn more about our business
We are one of the world's largest asset managers, with capabilities across asset classes to meet our clients' objectives and a longstanding commitment to responsible investing.
