Confidence in smart beta ETFs high, reveals EDHEC-Risk

Jun 30th, 2015 | By | Category: ETF and Index News

A quarter of investors are using smart beta strategies according to the 2014 EDHEC Risk Institute survey of ETF usage, with half of those employing ETFs to implement these strategies.

Confidence in smart beta ETFs high, reveals EDHEC-Risk survey

EDHEC-Risk survey points to a bright outlook for smart beta

The survey, produced with the support of Amundi, a leading European ETF provider, provides an optimistic outlook for the smart beta industry. The results point to significant growth in assets under management and product launches in the coming years, driven by a belief that these strategies can beat market capitalisation-weighted indices and the evolution of their role in the portfolio construction process.

Acceptance of smart beta in the investment community is high with 71% of respondents agreeing that the strategies have the potential to beat market capitalisation-weighted indices and 40% considering investment in such strategies in the near future. Investors appear to be optimistic that individual factors will be rewarded too, however this varies according to the factor in question. The survey shows that the highest level of confidence is in the value and size factors while low volatility received the lowest rating. Investors’ waning belief in low volatility strategies is perhaps reflective of expectations that the popularity of this strategy following the financial crisis has competed away prospective returns.

When asked what type of ETFs they would like to see developed, funds linked to smart beta and factor indices were the second and third most popular answer, just behind emerging market strategies. This alludes to the outstanding demand for these products and also the changing nature of ETF use. While ETFs may have been viewed in the past as simply a cost-effective form of broad market exposure, investors are increasingly looking to ETFs as building blocks and tactical tools in the institutional portfolio construction process.

While levels of satisfaction with smart beta ETFs are high, they lag traditional equity and bond ETFs. This is understandable given the strategies are relatively new. EDHEC see these results as encouraging, but symptomatic of the focus of many ETF providers on a handful of popular strategies such as value and low volatility. They expect more products to be released covering strategies such as momentum, size and quality, and for multi-factor ETFs to become prevalent as investors look for a product which will perform across the full market cycle. Combining strategies with low correlations is seen as a solution to this challenge, given that the individual strategies are prone to periods of underperformance.

The need for transparency around the strategies is of the utmost importance to investors with  88% of respondents agreeing that full transparency on methodology and risk analytics is required. While smart beta strategies may offer an opportunity to enhance returns, there are often biases in these strategies that are not entirely obvious, such as small-cap tilts in fundamentally-weighted products or sector concentrations in more pure factor products.

The survey coincides with the launch of the Amundi Index Equity Global Multi Smart Allocation Scientific Beta fund, an open-ended index fund version of their multi-factor strategy which is based on the EDHEC Scientific Beta Developed Multi-Beta Multi-Strategy ERC strategy index. This strategy blends four stock selection factors: volatility, valuation, size and momentum with five smart beta diversification strategies. The fund has been available as an ETF, the Amundi ETF Global Equity Multi Smart Allocation Scientific Beta UCITS ETF (SMRT FP), since July 2014 and is listed on Euronext Paris exchange.

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