23 June 2015

EDHEC-RISK Institute: Investor interest in and requirements for smart beta ETFs

EDHEC-Risk Institute solicited the specific views of European ETF investors on “smart beta” exchange-traded funds. From the results of the survey, it appears that investors show high interest in smart beta ETFs and have strong requirements for them.

At the end of 2014, EDHEC Risk Institute conducted a survey of European investment professionals on the usage and perceptions of ETFs. The aim of this study was to analyse the usage of ETFs in investment management and to give a detailed account of the current perceptions and practices of European investors in ETFs.

From the results of the survey, it appears that investors show high interest in smart beta ETFs and have strong requirements for them. The results show that investors already have considerable interest in such products. The fact that there are more respondents who are considering an initial investment than there are actually investing implies that we are likely to see strong growth in usage of smart beta ETFs in the future.

This extensive use of ETFs based on smart beta indices, as well as the desire for additional development, may be explained by the favourable perception that respondents have of smart beta indices as tools for improving their investment process, as shown by their answers to further questions. Investors were asked about their agreement with different propositions about smart beta indices including their potential to outperform cap-weighted indices, their ability to capture factor risk premia such as value and small cap, and their ability to avoid concentration in very few stocks or sectors.

For respondents, capturing factor premia is one of the prime motivations for investing in smart beta ETFs while transparency is important for market indices (i.e. indices that aim to represent a given market or segment), it is all the more so for smart beta indices. Indeed, while these new forms of indices can provide investors with improved risk-reward profiles or other benefits, they bring distinct risks of their own.

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