Smart beta ETF use on the rise, finds EDHEC

Mar 17th, 2016 | By | Category: Equities

The portion of investors putting their money into smart beta exchange traded funds has risen from 49% to 68% since 2014, according to the findings of EDHEC’s European ETF Survey 2015. The report, which investigates the current use of ETFs by 180 institutional European investors, showed that ETFs based on smart beta indices are of top concern to respondents when it comes to future growth, with 38% hoping for further development in this area.

ETF satisfaction at very high levels, according to EDHEC-Risk Institute

Valérie Baudson, CEO of Amundi ETF, Indexing & Smart Beta.

The EDHEC Survey, which is conducted as part of the Amundi ETF, Indexing & Smart Beta research chair at EDHEC-Risk Institute on “ETF and Passive Investment Strategies”, highlights investors’ high satisfaction rate and their expectations around Smart Beta solutions.

The survey also found that an increasing proportion of investors are using ETFs to gain access to a range of asset classes with satisfaction. The most popular asset class was equities with 91% of respondents confirming their use of ETFs as a vehicle for exposure, while sectors (86% of respondents) and commodities (82% of respondents) were second and third most popular choices respectively.

Of those who use ETFs to invest in equities, 95% of respondents seek exposure to broad market ETFs, 50% to sector ETFs and 37% to style ETFs. Broad market investing was a prevalent theme across asset classes; 88% of those that confirmed their use of ETFs to gain exposure to government bonds sought out broad market exposure, while 84% of corporate bond ETF-users sought out broad market exposure.

Satisfaction has remained at high levels especially for traditional asset classes. 98% of investors reported a high level of satisfaction with equity ETFs. Furthermore, sector-based (96% reported satisfaction), currency-based (93% reported satisfaction) and government bond-based (89% reported satisfaction) ETFs were all well received by investors. 86% of respondents reported high satisfaction with ETFs as a vehicle for smart beta exposure.

The satisfaction rates for ETFs based on the most liquid asset classes were far more consistent compared to those based on illiquid asset classes. The asset classes that were least well received were hedge funds (36% reported satisfaction) and commodities (65% reported satisfaction).

Professor Lionel Martellini, Director of EDHEC-Risk Institute, said in a statment: “This survey confirms the relevance of ETFs in institutional investors’ asset allocation. Smart beta indices appear to be a key growth area for the ETF industry looking forward, with an ever increasing focus on improved transparency and informational efficiency.”

The survey found that cost considerations were the main driver behind increasing ETF allocations. Total expense ratios were the most important criteria for investors when selecting ETFs for investment (73% reported it as a high priority), while bid/ask spreads were the third most important criteria (59% reported it as a high priority). Other factors motivating increasing allocations to ETFs included performance, transparency and liquidity. Specifically, a vast majority of respondents (94%) agree that smart beta indices require full transparency on methodology and risk analytics, to protect against conflicts of interest and to improve informational efficiency.

Commenting on the results of the survey, Valérie Baudson, CEO of Amundi ETF, Indexing & Smart Beta, said: “As a leading ETF provider, we have been developing a broad range of cost-efficient, transparent and innovative ETFs. The EDHEC Survey findings, highlighting investors’ high satisfaction rate and their expectations around Smart Beta solutions, incite us to keep on enriching our offering and guiding investors further when implementing smart beta strategies in their asset allocation.”

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