FIXED INCOME ETFS: Choosing your mood music

"(...)When it comes to smart beta and factor investing, the ratio is the other way around: equity ETFs predominate. However, the recent EDHEC report found “significant interest” in fixed income ...

Author(s):

Lionel Martellini

Director - EDHEC-Risk Institute
Professor of Finance - EDHEC Business School

"(...)When it comes to smart beta and factor investing, the ratio is the other way around: equity ETFs predominate. However, the recent EDHEC report found “significant interest” in fixed income smart beta solutions. Lionel Martellini, director at the EDHEC-Risk Institute, believes the fixed income sector is the new frontier in the development of meaningful smart factor investment solutions in the fixed income space, but that more research is needed. One reason is that the first generation of smart beta in fixed income markets was based on a direct transfer of fundamental indexing methodologies originally developed for equities. “The key problem in this approach is that it is unclear why some backward-looking trailing average of some arbitrarily selected variables should contain more useful information than, say, bond ratings, which for all their flaws are based on a much richer information set,” says Martellini. A more meaningful approach, in his view, is to construct investable proxies for rewarded risk fixed income factors such as interest rate and credit risk factors, but also liquidity risk factors, low-risk factors, carry factors, value factors and momentum factors, suitably extended to bond markets. But it ain’t easy. “The calibration of factor investing strategies in bond markets poses a number of specific technical and implementation challenges,” he says. (...)”

Type:
Date: le 03/12/2018
Source : Funds Europe

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