Innovations in Index Development

Innovation for the indexing industry

For the past year, we’ve been busy building the world’s best platform for creating indices and ETFs. We’ve had the pleasure of collaborating directly with hundreds of customers that are working toward a similar outcome - to create and manage portfolios of indices. We want to thank all of those who have spent hours working with us and refining our product, and also for all of the proprietary, actionable, and investable indices created on Thematic.

The feedback we’ve received on current solutions available in the market (such as S&P and Solactive) has been resoundingly clear. The incumbent products are 1) too damn slow and 2) too damn expensive. With today’s modern technologies and processes, there’s no reason why index creation can’t be accurate and fast. Here’s how we’ve been innovating on the process of developing and managing indices.

From spreadsheets to SaaS

Prior to Thematic, the process of developing an index was 100% manual. To start, an index developer would reach out to an index provider, and they’d send a questionnaire and spreadsheet for the developer to complete. The developer would return the spreadsheet to the provider, and weeks later it would eventually return, with errors. After addressing the errors, the developer would email the spreadsheet back again, and get on calls with the provider to go over changes. Six to eight weeks of hot potato later, the provider would provide a working draft version of the index.

Like most creative endeavors, building an index is an iterative process, but waiting weeks for each iterative cycle is unacceptable to us and to most index developers. Thematic’s Index Builder puts the entire iterative cycle in the index developer’s hands. To do so, we focus on speed and accuracy.

For most index developers, the iteration cycle has 4 main steps. The Index Builder gives the index developer the autonomy to move through and repeat those steps as needed, as fast as possible.

• Search: Easily find and choose securities to match a theme.
• Build: Choose a weighting methodology (we call this combination of securities and weighting a “strategy”) and other index settings.
• Backtest: In seconds, see how an index performs over time.
• Benchmark: Instantly see how the index compares to other indices and securities.

Now, as the index developer iterates on the strategy, changes are reflected in the backtest and benchmarks in real-time. Multiple strategies can also be created and compared in the same graph. Once satisfied, the index developer can publish the index, where Thematic will host and distribute it.

From day one, we have recognized that our product has to be accurate and fast to build trust and credibility in the indices on the platform. Hence, we spend a significant amount of time and effort building out our data management and index calculation capabilities. Our integrations with multiple financial data providers - Factset and Xignite - allow us to cross-check and validate data. Our data abstraction layer helps us to clean and manage the data before it’s implemented.

Thematic takes care of the “gritty” part of tracking a basket of companies over time - symbol changes, delistings, mergers, dividends - all of the challenging corporate actions that occur. We also have our own internal versions of public indices to compare our calculations. We draw from our past experience building high volume, high accuracy payment and reconciliation systems to perform index calculations quickly and accurately at scale.

Breaking down barriers

Historically, the indexing industry has been infamous for charging high fees - a basic index built by S&P will cost tens of thousands of dollars per year (IF they decide to work with you). Solactive has emerged in recent years as a low(er) cost provider that will still set you back close to $10,000 per year per index. The challenge with the traditional pricing structure isn’t only that it boxes out firms and individuals that can’t pay the annual fees; it’s also that the structure stifles creativity and innovation. If each experiment costs more than a new Rolex, not that many experiments will be run.

That’s why we’ve optimized Thematic’s packaging and pricing for index developers to create without limits. There are no limits on the number of strategies that index creators can build, compare, and iterate on. There are no limits on backtests, or benchmarks, or collaborators that one can work with. Building indices is a creative endeavor, and we’ve structured Thematic to be an essential part of the creative process, all the way down to pricing.

Our vision is for Thematic to be an essential product for research, for testing ideas and strategies, as well as creating and managing indices. Aspiring portfolio managers use Thematic to hone their craft and make a name for themselves. Venture capitalists create public market indices to extend their expertise from private investing. Asset management firms use Thematic to quickly run scenarios, aiding their decision making. We believe that we can help the investment community grow by breaking down structures that don’t make sense in the modern age and by providing great software as a service.

What’s next for Thematic?

Based on our customer feedback, here’s a few major initiatives that we’re actively working on to go head-to-head with the industry OGs - MSCI, S&P, Bloomberg, Solactive - and to drive the entire industry forward.

• International equities. Even though we currently have the ability to create equity indices that span countries and exchanges, we have yet to roll this out more broadly. Going international drastically increases our universe of securities, from 4200+ companies listed in the US to 630,000 globally; from 2 exchanges to over 60.
• An Index Builder update. Our first version optimized for speed and accuracy, and in doing so, we left several innovations on the cutting room floor. Our next Index Builder update will make it easier for creators to manage dozens of strategies, collaborate with their team, and manage their indices.
• AI powered assistance. We see a great opportunity to use AI to help with the “cold start” problem - “I have an idea, and I need help expressing that idea” in a way that can be turned into an index.

We’re so grateful for all of the support and feedback. This has been an incredibly rewarding and enlightening journey building out Thematic and we’d love to hear from more of you - please feel free to drop us a line at hello@gothematic.com.