About two-thirds of ETF users (67%) are using the vehicles to gain exposure to smart beta strategies, a considerable increase compared to 49% in 2014, according to the latest results of the 10th EDHEC European ETF and Smart Beta Survey.
Professor Lionel Martellini, director of EDHEC-Risk Institute.
The survey studies the investing habits of 211 European ETF and smart beta investors, conducted as part of the Amundi research chair at EDHEC-Risk Institute on “ETF, Indexing and Smart Beta Investment Strategies”. EDHEC-Risk Institute has conducted a regular ETF survey since 2006, providing a detailed account of European investor perceptions and practices in the domain of ETFs and smart beta strategies over the past decade.
Since 2006, the increase of the percentage of respondents using ETFs in traditional asset classes has increased from 45% of respondents using ETFs to invest in equities and 10% to invest in fixed income, to 91% and 65% respectively in 2016.
Gaining broad market exposure remains the main focus of ETF users for 71% of respondents. Costs and quality of replication are the two motivations for using ETFs: 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 (38% of respondents for both criteria).
The most important motivation for adopting smart beta strategies is to improve performance and manage risk. In terms of the actual product wrapper, respondents favour passive funds replicating smart beta indices (64%) but also use active solutions, albeit to a lesser extent (44%).
Replication of smart beta strategies are chosen for the following reasons: costs, transparency of methodology and availability of information, which represent the main reasons why passive strategies are normally selected. Discretionary strategies are preferred for the reactivity and dynamism they allow, with 68% of respondents indicating the ease to change portfolio allocation as the principal advantage.
Liquidity and capacity, index construction methodology and transaction costs are respondents most important considerations for assessing smart beta products. There is an important gap between required information and ease of access to this information. For example, data-mining risk and liquidity and capacity, which are crucial for respondents, are among the most difficult pieces of information to obtain.
Looking to the future, 63% of investors plan to increase their use of ETFs in the future despite the already high maturity of this market and the current adoption rates (compared with 55% in 2014 and 57% in 2015).
Lowering investment cost is the primary driver behind investors’ future adoption of ETFs for 87% of respondents.
The vast majority of respondents (94%) plan to increase their investment in smart beta products over the next three years.
Respondents were most interested in seeing further smart beta product development in the areas of fixed-income and alternative classes, while also preferring more customised solutions to be developed. These results suggest that development of new products corresponding to these demands may lead to an even wider adoption of smart beta solutions.
Commenting on the results of the survey, Fannie Wurtz, managing director at Amundi ETF, said: “The 10th edition of the EDHEC-Risk Institute survey offers the industry powerful insights on the growing use of ETF and smart beta allocations and their increasing importance in investors’ portfolios. Amundi, as the leading European asset manager, is a recognised player in the ETF, smart beta and factor investing field, which represents one of the group’s main growth drivers. We are fully committed to continue building innovative and customised solutions which respond to investors’ needs.”
Professor Lionel Martellini, director of EDHEC-Risk Institute, added: “The survey confirms that transparency and the possibility of making explicit choices on risk exposures are key drivers behind investors’ growing appetite for smart beta. At the same time, the industry yet has to make progress on offering better insights into risks and more flexibility to allow investors to fully exploit the potential of smart beta strategies.”