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Anil Rao

Anil Rao
Executive Director, Equity Solutions Research

Thomas Verbraken

Thomas Verbraken
Executive Director, MSCI Research

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The Pressure of the Crowd: Stress Testing Thematic Indexes

  • Flows into thematic investments during the first quarter of 2021 kept up their rapid pace from 2020. Investors could be concerned about crowding in this segment.
  • MSCI’s stock-crowding model revealed most MSCI thematic indexes were not significantly more crowded than the MSCI ACWI IMI Growth Index.
  • Crowding in the efficient-energy theme rose throughout 2020 and stayed moderately high through Q1 2021. Its underperformance since March can be explained, in part, by its crowding characteristics.

Thematic investments, to date, have gathered assets this year at the same steady pace they did throughout 2020. The Financial Times noted recently that thematic ETFs had over USD 40 billion of inflows through the first two months of this year, bringing their total AUM to just shy of USD 400 billion.1 Investors could be concerned about whether this fast-growing segment has become crowded and poses a sell-off risk.2

In this blog post, we use MSCI’s stock-crowding model to identify which themes could be considered crowded. We then stress test those themes to understand how they could respond to an equity sell-off triggered by macroeconomic headwinds.


This Crowd Has Energy

The exhibit below shows the weight of crowded stocks in each of MSCI’s thematic equity indexes, as of March 2021. This measure is based on a stock-crowding model that incorporates valuation, trading volume, volatility, momentum and short interest.3


Levels of Crowding in Thematic Indexes

USA Technology refers to the USA Small and Midcap Information Technology Index as of April 1999. All other weights are as of March 2021 and use the MSCI integrated stock-crowding score.

We found that most of the thematic indexes were not considerably more crowded than a growth benchmark, represented here by the MSCI ACWI Investable Market Index (IMI) Growth Index, which had approximately 1% crowded stocks by weight. One theme, however, did stand out. The MSCI ACWI IMI Efficient Energy Index had 8% crowded stocks by weight as of the end of March 2021. For reference, this was similar to the level of crowding we saw in smaller-cap U.S. technology stocks in 1999.

Tracing the Efficient Energy Index’s crowding history, beginning in 2017, we see in the exhibit below that the index became progressively more crowded throughout 2020, as equity markets rebounded from their lows in March of that year. The theme continued its upward trajectory through the end of the year and into the first quarter of 2021.

We also found that the future-education and genomic-innovation themes responded similarly until late 2020. Their crowding could reflect investors’ appetite for firms involved in telepresence and genomic sequencing, for example. Positive vaccine-related developments may have led, in part, to their becoming less crowded toward the end of the year.


The History of Crowds

Weights are measured monthly and are shown from 2017 onwards, for thematic indexes for which simulated history is available. Values shown are the rolling average over the trailing three months.

The potential impact is large. The Efficient Energy Index consists of firms that offer products and services that promote power generation using renewable sources. We found that the five largest renewables-themed ETFs by AUM had similar to slightly higher weights in crowded stocks. Additionally, many of the most crowded stocks were held across multiple funds.


Stress Testing and Tail Risk

Next, we stress tested the efficient-energy theme in three macroeconomic scenarios of varying severity. These scenarios follow from our earlier blog post on stress testing inflation, and ranged from optimistic (reflation) to a benign slowdown (an overheated economy) to a severe economic headwind (stagflation). While stagflation might be considered a lower-probability tail risk, its severity is helpful to further understand the link between crowding and a sharp potential market sell-off.4

The scenario results for the efficient-energy theme, as well as the MSCI ACWI IMI Growth Index and the broad-market MSCI ACWI IMI, are shown in the exhibit below.


Projected Returns Under Different Scenarios

Index constituents and factor covariances as of March 31, 2021. The MSCI Multi-Asset Class (MAC) model is used to propagate shocks.

The model’s results indicate that the efficient energy theme is more sensitive in the severe scenario than the growth benchmark, which in turn is more sensitive than the MSCI ACWI IMI. The efficient-energy theme underperforms growth in the severe scenario by over 10%.


A Tale of Two Factors

Why is the efficient-energy theme more vulnerable than growth in this scenario? We look at this potential underperformance based on the style-factor, industry, country and currency exposures the Efficient-Energy Index has compared to the growth benchmark.


Efficient Energy’s Return Attribution in the Severe Scenario

Index constituents and factor covariances as of March 31, 2021. The MSCI Multi-Asset Class (MAC) Model is used to propagate shocks.

Of these, style factors stood out sharply as the difference maker, as shown in the exhibit above. Within style, momentum and volatility were the largest detractors. We previously highlighted these two factors for having rewarded investors handsomely in 2020, but historically jolting investors during market reversals. As shown in the exhibit below, the largest potential losses for the efficient-energy theme arise from its positions in high-momentum U.S. and European stocks, according to our model.


Efficient-Energy Theme’s Exposure to the Top-5 Detractors from Style-Factor Returns

Index constituents and factor covariances are as of March 31, 2021, and use the MAC model. Only the top-five detractors to style-factor return are shown. Returns and exposures are relative to the MSCI ACWI IMI Growth Index.


Under Pressure

Investors in thematics face a challenge in balancing exposure to long-term trends such as renewable power generation given substantial recent inflows. Tools such as crowding scores and stress testing could provide useful insights to help address this challenge.

Our analysis revealed the pressure from crowding was real, but the verdict on its impact was split. Compared to the broader market, most themes were far from the madding crowd. The current drawdown in the efficient-energy theme, however, could be explained, in part, by its elevated level of crowding and its factor sensitivity in the preceding months.

The authors thank Jay Yao for his contribution to this post.



1Boyde, Emma. “Thematic ETF assets surge to new record buoyed by Ark funds.” Financial Times, March 24, 2021.

2Johnson, Steve. “Robotics ETFs hit by ‘massive’ outflows in March.” Financial Times, April 19, 2021.

3We measure index crowding by summing the weight of stocks in each index that have an integrated crowding score greater than 2.

4We model stagflation as an environment in which inflation jumps substantially and remains elevated. Economic growth slows, while nominal interest rates rise. U.S. equity markets decline, corporate-credit spreads widen and the U.S. dollar weakens against the euro.



Further Reading

Are (Stock) Bubbles Rising?

How Inflation Could Affect Multi-Asset-Class Portfolios

The Pace of Fast Change: Growth vs. Thematic Investing

Innovation Remix: Adding Thematics to Equity Programs