MerQube Thematic indices can achieve more precision as a building block

MerQube is one of the latest entrants to the structured products market and managed to place its MerQube’s US Tech+ Vol Advantage Index as one of the highest selling thematic indices in the US market –the index was used in 246 products issued via J.P. Morgan in the US worth US$74mn in 2022.

The MerQube’s US Tech+ Vol Advantage Index which is licensed on an exclusive basis to J.P Morgan, which also has a stake in the index provider, was featured across 366 products (US$222m) sold in the US.

MerQube’s identity as an index provider is very much geared towards scaling technology and looks at thematics as a very broad area where a lot of things can be included.

“When we develop an index, we typically work with a third-party provider to get the data sets behind it, and then design the strategy,” says Vinit Srivastava, CEO at MerQube.

“Then there are additional layers - decrement, risk controlwhich is just a means to make the structure more efficient, whether it’s AI or ESG related. The evolution of indexing is happening, and there is a need to get more data and bigger data sets quickly.”

Thematics represent the natural progression of the evolution of indexing and allows investors to gain access to much more specific themes and even single stocks to achieve a specific goal, according to Roby Muntoni as chief commercial officer.

“Back in the days, investment opportunities were restricted to a few indices or a few asset classes. Now indices have become almost like another tool to get into a bigger strategy or get additional precision in your exposure to a theme,” she says, noting that indexing as a whole has become mainstream as not just the strategy but potentially as a building block that drives efficiency in pricing.

“Thematic indices is a reflection of that evolution driven by people demand which is getting more and more precise,” says Muntoni.

“We can see how different themes are evolving and how investors want specific exposure to certain themes - ESG has become the front and centre for many investors, and you can see a bifurcation and the development of new sub-themes like carbon efficiency, Paris-aligned and socially responsible investing (SRI), etc.”

According to Srivastava, thematics are getting more and more precise while the classification of themes is being driven by all kinds of company data, “and the realisation that new and alternative datasets can be used to have a better view of the same set of stocks, like how stocks behave as a group”.

“The development of thematic indices mirrors the evolving economy and landscape – and the expansion of the investment toolkit,” he says. “Thematics is not just a very precise tool but it’s also very flexible as it allows you to develop new strategies based on old concepts such as rotation.”

Putting a label is the easiest way to explain what you’re trying to achieve and ensure that it resonates with the end investor, according to Muntoni.

“But if you look under the hood at the end of the day, what we do as an index provider is to allow people to invest in what they believe and what they think,” says Muntoni.

“Thematic strategies make sense as long as the components in an index offer an efficient way to gain exposure to a specific growth story – either they are tracking a stock or` have a specific pointed goal, as long as that becomes efficient. To some extent, the index is just yet another vehicle to facilitate access and exposure.”

Thematic indices can achieve more precision as a building block which explains the tremendous increase in the use of thematic indices and other strategies in structured products.

“The passive investment market continues to evolve and overcome some of the limitations of the active management approach - to some extent some of these tactical strategies were only available through active managers because the portfolio manager knew how to use the standard strategies,” says Muntoni.

“Now, thematic investing can be accessed by a broader consumer base. Once they make the changes necessary to include ETFs in 401k platforms as opposed to mutual funds, ETFs are going to attract a tonne of AUM.”

Srivastava notes that in the US, the focus on payout structures like autocall is putting pressure on structure products providers to innovate.

“A self-directed investor is often more biased to investing in themes and a passive approach can deliver good value,” he says.

“If you look at the US insurance market, some of which is advisor-driven, you have to convince the advisor that a theme is real and has a place in the portfolio. It is important to identify themes that are long-lasting.”

Muntoni agrees that self-directed investors can benefit from a thematic approach as it can match their emotional investing side via narrower types of themes.

“People in general associate with stories and a narrative, so having a theme is particularly important,” says Muntoni. “To some extent, direct indexing is probably an extension of thematic investing/ indexing because you can look at a theme and go narrower in relation to the investor views. If you have one specific thing that you want to invest in, then you could chase that with direct indexing.”

This however, according to Muntoni, is related to the knowledge base and the desire to interact with the portfolio as opposed to somebody else doing it.

“I think that we often forget that the majority of the people prefer somebody else to choose and to create that story for them,” she says.

Going forward, MerQube will continue to focus on building its technology to increase speed to market and build new complex strategies.

“The technology is scalable so that we can achieve economies of scale with precision,” says Srivastava. “One of the things that that we see is that when you are in a big name, it’s difficult to shift your technology or to make tactical moves. We’re a technology provider by default and became an index provider because we serve the index space as well as the rules-based investing approach.”

According to Muntoni, the growth of indexing means that is going to become a commoditised tool to develop transparent strategies.

“We want to capitalise on the demand for custom strategies and thematic indices as our technology can power scalable solutions and achieve speed to market,” she says. “We are well positioned to offer clear benefits to product providers as we can create alpha strategies and produce better pricing. It will become more of a staple as we go forward.”

On the use of overlays, such as decrement or risk control, Srivastava notes that the decrement overlay hasn’t really caught on in the US market because the dividend risk which is very low on the S&P 500 which is the main underlying of structured products in the country.

In contrast, thematic baskets feature higher dividend risk, and they lend themselves better for an efficient use of decrement,” he says.

However, according to Srivastava , it is imperative that the retail audience buying products linked to decrement indices understand the difference between the decrement in points and in percentage.

“What you’re getting and what’s the outcome - it has to be made very clear,” he says.