Insights from the 11th EDHEC European ETF and Smart Beta and Factor Investing Survey
EDHEC-Risk Institute conducted its 11th survey of European investment professionals about the usage and perceptions of ETFs and smart beta and factor investing, as part of the Amundi research chair at EDHEC-Risk Institute on “ETF, Indexing and Smart Beta Investment Strategies”. The aim of this study is to analyse current European investor practices and perceptions on ETF and smart beta and factor investing strategies, as well as future plans in these domains. By comparing our results to those of our previous surveys, conducted for over a decade, we aim to shed some light on trends within the ETF market and within the smart beta and factor investing strategy offer.
Since 2006, EDHEC has annually surveyed European investors about their views on and uses of ETFs. Starting in 2013, when we first considered smart beta in the survey, complementary questions about smart beta and factor investing strategies have been added each year to the survey, allowing participants to describe their general use of and give their opinions on products that track smart beta indices, and more generally on alternative equity beta strategies. A full section of the survey is now dedicated to smart beta and factor investing strategies. In the present edition of the survey, we complement this group of questions with new ones on smart beta and factor investing for fixed-income, in relation to the recent considerable development in these types of indices.
ETFs are perhaps one of the greatest financial innovations of recent years, as they combine the advantages of mutual funds and common stocks. Nowadays, growing demands for indices as investment vehicles has led to innovations, including non-cap-weighted or smart beta indices that seek to generate superior risk-adjusted returns compared to standard market-capitalisation-based indices. This survey brings together the main strands of passive investment, namely ETFs – which are standard and very liquid products that track indices – and strategies based on the new forms of indices.
Our 163 survey respondents are high-ranking professionals within their organisations (37% belong to executive management and 33% are portfolio managers), with large assets under management (36% of respondents represent firms with assets under management exceeding €10bn). Respondents are distributed across different European countries, with 17% from the United Kingdom, 69% from other European Union member states, 13% from Switzerland and 1% from other countries outside the European Union.
Key findings of the latest survey included the following:
HOW DO INVESTORS SELECT AND USE ETFS?
About two-thirds of respondents (67%) used ETFs to invest in smart beta in 2018, a considerable increase compared to 49% in 2014.
- Satisfaction has remained at high levels, especially for traditional asset classes, with a significant increase in satisfaction with equity ETFs and government bonds, which now enjoy a satisfaction rate of 97% and 92%, respectively, compared to 93% and 86% in 2016. Investors are more reserved about ETFs for alternative asset classes.
- Since 2006, the increase of the percentage of respondents using ETFs in traditional asset classes has been spectacular: in 2006, 45% of respondents used ETFs to invest in equities, compared with 92% in 2018. As for governments and corporate bonds, the result went from 13% and 6% in 2006, to 62% and 66%, respectively, in 2018.
- Gaining broad market exposure remains the main focus of ETF users for 71% of respondents (and 92% of respondents use broad market ETF for equity investments, and 74% and 79% to invest in government bonds and corporate bonds, respectively).
- Costs and quality of replication are the two criteria dominating investor preoccupations, related to the main motivations for using ETFs (89% and 83% of respondents, respectively): reducing the investment costs, while tracking the performance of the index. Qualitative criteria considered by investors are the long-term commitment of the provider and broadness of the range (41% and 38% of respondents, respectively).
KEY OBJECTIVES DRIVING THE USE OF SMART BETA STRATEGIES
There is an important gap between required information and ease of access to this information: ‘liquidity’ along with ‘capacity and transparency’ on portfolio holdings are pieces of information crucial for respondents for assessing smart beta products but also appear to be among the most difficult to obtain, while relatively basic information such as the index construction methodology also appears to be not-easily available. A vast majority of respondents (90%) agree that smart beta indices require full transparency on methodology and risk analytics. Transparency is not only the best protection against the risks arising from conflicts of interests, but it is also instrumental in improving the informational efficiency of the indexing industry.
- The most important motivation for adopting smart beta strategies is to improve performance and manage risk. Despite this strong motivation, 83% of respondents hold less than 20% of their total investments in smart beta and factor investing strategies.
- In terms of the actual product wrapper, respondents favour passive funds that replicate smart beta indices (63%) but also use active solutions, albeit to a lesser extent (49%). The biggest advantage of replicating indices over using discretionary strategies is seen in the area of mitigating conflicts of interest between provider and investors and the broadness available solutions.
- Respondents most frequently use smart beta / factor-based exposures to harvest long-term premia (as opposed to tactical use).
- Respondents show a significant interest for smart beta and factor investing for fixed-income and plan to increase their investment in it but do not consider there to be enough research in the area.
FUTURE DEVELOPMENTS ON ETF & SMART BETA PRODUCTS
- 50% of investors still plan to increase their use of ETFs in the future despite the already high maturity of this market and high current adoption rates.
- Lowering investment cost is the primary driver behind investors’ future adoption of ETFs for 86% of respondents in 2018 (which is an increase from 70% in 2014).
- Top concerns for the respondents are the further developments of Ethical / SRI ETFs (34%), as well as emerging market equity ETFs (32%) and emerging market bond ETFs (31%).
- When asked about the smart beta solutions they think required further product development from providers, results indicated the areas of fixed-income and alternative classes to be of the highest relevance. There is a particularly critical lack for the fixed-income asset class that is widely used by investors. The development of new products corresponding to these demands may lead to an even wider adoption of smart beta solutions.
The research from which this study is drawn was produced as part of the Amundi research chair at EDHEC-Risk Institute on “ETF, Indexing and Smart Beta Investment Strategies”.