Investors have called for new products and more innovation in fixed income and socially responsible investment (SRI) ETFs, according to the twelfth edition of EDHEC’s European ETF and Smart Beta & Factor Investing Survey.
The survey, conducted as part of the Amundi research chair at EDHEC-Risk Institute, looked at the investing habits of 182 European professional and institutional ETF and smart beta investors.
According to the results, more than two-thirds (68%) of respondents believe that smart beta and factor solutions are useful in harvesting additional risk premia in fixed income portfolios.
Despite the agreement over the benefits of smart beta within fixed income, the survey also found that just 13% are currently investing in smart beta bond products. Additionally, amongst those who are current users, nearly three-quarters (73%) invest less than 20% of their total fixed income allocation in smart beta strategies.
The main reasons given for not investing in smart beta fixed income is because the current offer is not seen to be addressing the relevant risk factors and there is a lack of research in the area. Each reason was cited by 38% of respondents.
When asked what factors are most relevant in fixed income markets, about three-fifths of respondents highlighted carry/level of the yield curve, credit, and slope of the yield curve (cited by 63%, 60%, and 58% respectively).
The research also pointed to potential growth for products linked to ethical or SRI (also known as environmental, social, and governance (ESG)) strategies. According to the results, 31% of respondents indicated that they would like to see new developments in SRI, although this is slightly down on last year when 34% noted their desire for these products.
Strategies based on multi-factor indices were also identified for further development with 30% asking for the segment to be built-out.
Smart beta and ETFs
ETFs remain a popular choice for accessing smart beta strategies with two-thirds (66%) of respondents using the vehicle for this purpose in 2019. This represents a considerable increase on 2014 when just under half (49%) accessed smart beta via ETFs. However, the adoption of smart beta ETFs appears to be paring back slightly, with usage levels of 67% recorded in 2018 and 2017.
The research also found that ETF usage is becoming more tactical. For the first time, the use of ETFs for tactical allocation was higher (53%) than for long-term buy and hold (51%). According to EDHEC, this more balanced usage suggests that the ETF market is maturing and users are becoming more proactive.
Amongst those who are currently investing in smart beta and factor strategies, improving performance is the main motivation for using these products while managing risk is also considered an important criterion.
Commenting on the results of the survey, Fannie Wurtz, Head of Amundi ETF, Indexing & Smart Beta, said, “The results show once again the significant role of ETFs in investor’s portfolios and rising interest in fixed income ETFs. The demand for smart beta and factor solutions keeps increasing too, as well as solutions that apply ESG criteria. As the leading European asset manager and a pioneer on socially responsible investing, Amundi continues innovating to answer to investors’ needs.”
Professor Lionel Martellini, Director of EDHEC-Risk Institute, added, “The 2019 edition of the EDHEC European ETF, Smart Beta and Factor Investing Survey conducted as part of the Amundi research chair at EDHEC-Risk Institute on “ETF, Indexing and Smart Beta Investment Strategies” shows a true coming of age in investors’ perception and usage of ETFs, which have become mainstream investment instruments for asset owners and are increasingly used in active market, sector-specific but also factor rotation strategies.
“There is a substantial appetite for new development in the area of SRI and fixed income factor investing, where academically grounded product innovation is still needed.”