Investor Interest in and Requirements for Smart Beta ETFs

Felix Goltz, Véronique Le Sourd: Exchange-traded funds (ETFs) are perhaps one of the greatest financial innovations of recent years.

Author(s):

Felix Goltz

Head of Applied Research at EDHEC-Risk Institute.

Veronique Le Sourd

Senior Research Engineer at EDHEC-Risk Institute.

Unlike conventional index funds, ETF units trade on stock exchanges at market-determined prices, thereby combining the advantages of mutual funds and common stocks. Most of them represent passive instruments designed to track the performance of a financial index as closely as possible. Recently, the standard practice of using a capitalisationweighting scheme for the construction of indices has been the target of harsh criticism. Nowadays, growing demand for indices as investment vehicles has led to innovations including new weighting schemes and alternative definitions of sub-segments. There are many recent initiatives for non cap-weighted ETFs as well. Since the first fundamental factor-weighted ETF launched in May 2000, there have been quite a number of ETFs introduced to track nonmarket cap-weighted indices, including equal-weighted ETFs, minimum variance ETFs and characteristics-weighted ETFs. These have been coined “Smart Beta ETFs” as they seek to generate superior riskadjusted returns compared to standard market capitalisation-based indices. Alternative equity beta investing has received increasing attention in the industry recently. Though products in this segment currently represent only a fraction of overall assets, there has been tremendous growth in terms of both assets under management and new product development. At the end of August 2014, according to ETFGI, 15% of assets in equity ETFs or ETF-like products were in products tracking “Smart Beta” indices and assets invested in smart beta ETFs or ETF-like products have been increasing at a 5-year compounded annual growth rate of 36.1%, compared with a 5-year compounded annual growth rate of 17.8% for assets invested in cap-weighted ETFs or ETF-like products. Moreover, a study from Cogent Research reveals that about half of institutional investors will increase their investment in smart beta ETFs in years to come.
Pdf
Investor Interest in and Requirements for Smart Beta ETFs...
(-1.00 B)
Type: EDHEC Publication
Date: le 06/04/2015
Extra information : For more information, please contact EDHEC Research and Development Department [research@drd.edhec.edu]
Research Cluster : Finance

See Also

Nikolaos Tessaromatis speaking on factor investing at the 8th Wealth Management Forum
News
- 12-11-2018
Nikos Tessaromatis, Professor of Finance, EDHEC Business School and Member, EDHEC-Risk...
A Reinterpretation of the Optimal Demand for Risky Assets in Fund Separation Theorems - EDHEC-Risk Institute research article in Management Science
News
- 12-11-2018
We are pleased to enclose an EDHEC-Risk Institute research article published in the...
OTHERWISE#7 : NEW WAYS FOR ECONOMY AND BUSINESS
News
- 09-11-2018
Artificial Intelligence at the heart of Otherwise #7: « Our business school’s digital...
EDHEC Business school joins global alliance to revolutionize online education and flexible learning
News
- 02-11-2018
EDHEC has joined a group of five leading business schools to launch a new digital...