EDHEC-Risk’s 10th European ETF and Smart Beta Survey brings new insights on drivers for product adoption & challenges faced by investors
EDHEC-Risk Institute has announced the results of the 10th EDHEC European ETF and Smart Beta Survey, a comprehensive survey 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.
Key findings of the latest survey included the following:
HOW DO INVESTORS SELECT AND USE ETFS?
- 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 and 10% to invest in fixed income, compared with 91% and 65% respectively in 2016.
- Gaining broad market exposure remains the main focus of ETF users for 71% of respondents (despite variations, values obtained in 2016 are equal to the long-term mean, from 2009 to 2016).
- Costs and quality of replication are the two criteria dominating investor preoccupations, related to the main 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).
- About two-thirds of respondents (67%) used ETFs to invest in smart beta in 2016, a considerable increase compared to 49% in 2014.
KEY OBJECTIVES DRIVING THE USE OF SMART BETA STRATEGIES
- 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.
- The pieces of information respondents consider important for assessing smart beta products are liquidity and capacity, index construction methodology and transaction costs. 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.
FUTURE DEVELOPMENTS ON ETF & SMART BETA PRODUCTS
- 63% of investors actually 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.
- Top concerns for the respondents (54%) are the developments of ETFs in at least one of the following three categories: ETFs based on smart beta indices, on multi-factor indices, and on single-factor indices. The development of ETFs in the equity asset class is also one of the top concerns of respondents.
- The vast majority of respondents (94%) plan to increase their investment in smart beta products over the next three years.
- 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. Respondents would also like more customised solutions to be developed. The 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, Indexing & Smart Beta, 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.”
A copy of the EDHEC-Risk Institute survey can be found here: EDHEC-Risk Institute Publication 10th EDHEC European ETF and Smart Beta Survey
This research was supported by Amundi as part of the research chair at EDHEC-Risk Institute on “ETF, Indexing and Smart Beta Investment Strategies.”