Institutional and wholesale investors have signaled their intention to ramp up allocations to factor ETFs, according to a recent study from Invesco.
The 2021 Invesco Global Factor Investing Study polled 130 institutional investors and 111 wholesale investors who are already investing in factor strategies and collectively responsible for over $31 trillion in assets.
The research found that almost half (46%) of institutional investors expect to increase their use of factor ETFs over the next three years, up from 31% that had indicated the same intention three years ago.
No institutional investor surveyed expects to scale back their allocation to factor ETFs over the next three years.
Wholesale investors also remain favourable towards factor ETFs with 43% saying they expect to increase their allocation to factor ETFs over the next three years.
Georg Elsaesser, Senior Portfolio Manager, Quantitative Strategies at Invesco, said: “The research has found continued momentum around factor ETFs. For some investors, ETFs act as the cornerstone of an entire strategy. Others use them tactically, or as portfolio completion tools. This wide range of use-case explains why institutional use of factor ETFs is accelerating particularly rapidly.”
When polled on their expectations for product innovation, investors appeared to be particularly interested in the intersection between factor-based and socially responsible strategies. Nearly half (46%) indicated they would be more likely to invest in a factor ETF if it incorporated ESG criteria.
Georg Elsaesser noted: “While factor ETFs have expanded and grown, there is significant unmet demand and a need for further product development in fundamental areas such as fixed income and ESG. Indeed, the fact that nearly half of respondents would be more likely to invest in a factor ETF if it incorporated ESG clearly underscores a compelling market opportunity.”
While fixed income accounts for a notably smaller share of the factor ETF landscape compared to equities, this dynamic appears poised to change with more than two-fifths (45%) of investors interested in these products. The main benefit cited for incorporating factors within fixed income portfolios was the potential for additional sources of return and diversification in the challenging low-yield environment.
Despite strong demand, uptake of factor-based fixed income ETFs appears to be experiencing some resistance. The study found that while equity factor portfolios are more likely to be invested via ETFs than the overall equity portfolio (26% vs 20%), the reverse is true for fixed income (11% vs 18%).
For wholesale investors, the limited availability of fixed income ETFs is seen as the largest challenge to adoption, while institutional investors noted data and technology shortcomings as more significant.
The study also found that value has been the most in-demand factor recently with 42% of investors increasing their allocation to value strategies over the previous 12 months. Almost half (48%) of investors agreed that they had increased their allocation to value in preparation for a post-pandemic recovery.
The rapid uptake of a multi-factor approach has also seen factor investing become more dynamic. Only 22% of investors strive to keep factor exposures completely fixed over time, while around half (48%) said they allow for variation in exposures over the long run and a third (35%) change their exposures regularly. The flexible approach looks set to become more popular with 41% expecting to be more dynamic over the next two years.
Georg Elsaesser concluded: “The post-pandemic period tested some of the assumptions around the benefits of factor investing. However, most investors report that adopting a factor approach has been successful and there has evidently been a strong uptake towards factor investing strategies, including through the use of ETFs. The growing allocation reflects a broader adoption as investors consider factors in the context of the whole portfolio and in asset classes beyond equities.”