Lyxor, one of Europe’s leading exchange-traded fund providers, is partnering with investment bank JP Morgan to launch a range of risk factor ETFs designed to provide exposure to the core drivers of equity market returns.
Arnaud Llinas, Head of ETFs and Indexing at Lyxor
The ETFs will be based on indices developed by JP Morgan and are expected to focus on five risk factors: low size, value, momentum, low beta and quality. According to research from Lyxor these factors have historically explained much of the performance of diversified portfolios and, importantly, have a solid theoretical grounding.
Risk factor ETFs are designed to capture systematic sources of return in the equity market which have historically delivered risk-adjusted returns in excess of market capitalisation-weighted indices. In contrast to many smart beta products, which capture a combination of market beta and factor risk premia by tilting the weightings of a broad range of holdings towards these factors, the Lyxor products should provide a more pure exposure to factor returns by targeting only those equities which exhibit the relevant characteristics.
The range could be used to express short-term tactical market views, replace style-driven active managers, or to make long-term adjustments to core market capitalisation-weighted portfolios. Given the correlation between these factors is often relatively low, combining these ETFs could also provide an excellent source of risk diversification.
Commenting on the announcement, Arnaud Llinas, Head of Lyxor ETFs and Indexing, said: “Constantly in search for innovative and well-performing investment solutions, we are excited to launch these risk factor ETFs with JP Morgan. The growing interest for risk factor investing stems from investors’ need for portfolio allocation tools focusing on the core drivers of equity markets performance. Lyxor’s approach focuses on five factors (low size, value, momentum, low beta and quality) backed by in-depth research and empirically proven to be very effective”.
Rui Fernandes, Head of EMEA Equities Structuring and Fund linked Products at JP Morgan, added: “We are delighted with this partnership with Lyxor. Investors are seeking more cost efficient and risk adjusted alternatives as they continue to invest into equities, and ETFs present a convenient format in which to do that. These products will be based on JP Morgan’s smart beta indices, which are designed to allow investors to isolate specific sources of risk and return within their portfolios in an effort to maximize performance.”
Lyxor’s range of factor ETFs will come up against competition from other factor-based ETFs from providers such as iShares and Deutsche Asset & Wealth Management. The new ETFs are expected to be listed in the course of the coming month at which time we will be able to determine how the Lyxor range compares.