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Smart Beta Interest Remains Piqued

Traders Magazine Online News, October 8, 2018

John D'Antona Jr.

Smart Beta remains tops among the exchange-traded fund (ETF) investing public.

That’s according to the latest survey from the EDHEC-Risk European ETF and Smart Beta and Factor Investing Survey, which aims to provide insights into European investors' perceptions, practices and future plans in the domain of ETFs and Smart Beta.

This year, the survey also includes a special focus on Smart Beta product development, considering specific client demand in the fixed-income field.

To summarize the main findings of the study: 

• Appreciation has remained at high levels, especially for traditional asset classes, with a significant increase for equity ETFs and government bonds which now enjoy rates of 97% and 92%, respectively.
• About two-thirds of respondents (67%) used ETFs to invest in Smart Beta in 2018, a considerable increase compared to 49% in 2014.
• 50% of investors still plan to increase their use of ETFs in the future despite the already high maturity of this market and high current adoption rates. Top concerns for the respondents are the further developments of Ethical / SRI ETFs, emerging market equity and bond ETFs and Smart Beta ETFs, including multi-factor and smart bond indices.
• Respondents show a significant interest for Fixed-Income Smart Beta solutions and plan to increase their investment in them, but they do not consider there to be enough research in the area...

The survey gathered information from 163 European investment professionals concerning their practices, perceptions and future plans. The respondents are high-ranking professionals within their organisations (37% belong to executive management and 33% are portfolio managers), with large assets under management (36% of respondents represent firms with assets under management exceeding 10bn).2 Respondents are distributed across different European countries, with 17% from the United Kingdom, 69% from other European Union member states, 13% from Switzerland and 1% from other countries outside the European Union.

“Analysis of responses to our survey allowed us to shed light on several important questions regarding investor perceptions on ETFs. Moreover, we gain insights into the perceived benefits and challenges with smart beta and factor investing strategies. In fact, we find that adoption of such approaches is still partial despite a decade of discussion in the industry, with the vast majority of adopters investing less than 20 per cent of their portfolio in such approaches

It was therefore interesting to better understand the challenges investors face when analyzing such strategies. Our survey points to the important shortcomings of current smart beta offerings, which may explain the slow adoption by industry participants. For example, investors perceive a lack of transparency and difficulty in accessing information on such strategies, in particular on risk categories such as data-mining risks. In the case of fixed-income strategies, investors express doubts over the maturity of research results at this stage. Investors also see a need for further developments of long/short equity strategies based on factors, strategies that address client-specific risk objectives, and strategies that integrate environmental, social and governance (ESG) considerations. Smart beta researchers and product providers doubtlessly have to work on improving their solutions for smart beta and factor investing strategies to make it into the mainstream. Below, we provide a summary of our results by emphasizing the key conclusions of our survey.”

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