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Indices & Benchmarks - September 21, 2016

Investor Perceptions about Smart Beta ETFs

EDHEC-Risk Institute conducted its 9th survey of European investment professionals about the usage and perceptions of ETFs at the end of 2015. The aim of this study was to analyse the usage of exchange-traded funds (ETFs) in investment management and to give a detailed account of the current perceptions and practices of European investors in ETFs. Responses were provided by 219 European investment decision-makers, 180 of which were ETF users. The survey respondents were from 25 different countries, with 41% of them being from the UK and Switzerland. A vast majority of survey respondents were Institutional managers (76%) and more than half of the respondents (51%) were asset managers.

For the third year running, in view of the considerable development in new forms of indices, as well as the increasing attention smart beta ETFs have received in the media in the recent years, part of the survey was dedicated to investment professionals’ practices and use of products tracking smart beta indices and on the importance of risk factors in alternative equity beta strategies. The present document is a focus on investor perceptions about smart beta ETFs, as reported by the survey.

From our survey, it appears that investment professionals have a growing interest in smart beta ETFs, but also have strong quality requirements concerning the underlying indices, most notably in terms of transparency. Our research concerning investor perceptions about smart beta ETFs allow us to draw the following conclusions:

  • ETFs are used frequently and make up an increasing proportion of portfolio holdings in the smart beta asset classes;
  • Satisfaction rates for smart beta ETFs appears to be stable at high levels for three years;
  • However, despite growing interest and high satisfaction with smart beta, the results of the survey show that investors allocate most resources to the appraisal of active managers, fewer resources to the evaluation of cap-weighted indices, and even fewer to the assessment of smart beta
  • Investors show a keen interest in smart beta ETFs based on agreement with research results on the benefits of smart beta. In addition, investors require full transparency on methodology and risk analytics for smart beta indices;
  • Investors have strong requirements for equity factors, including both a risk-based economic rationale and extensive empirical evidence;
  • However, there is an important gap between investors’ information requirements for smart beta and accessibility of information from providers.

Overall it thus appears that smart beta ETFs are highly sought after by investors. However, at the same time, investors face challenges in terms of their ability to evaluate these products. In particular, our results suggest that investors employ limited resources for smart beta evaluation and they do not believe that information considered important for assessing smart beta strategies is made available to them by providers with sufficient ease, especially when it comes to data-mining risks and holdings-based information needed for risk assessment.

In the end, the mismatch between investors’ great expectations in smart beta, and the lack of resources to carry out comprehensive and due diligence analysis on smart beta products, is a thorny issue. The asymmetry of information between smart beta investors and smart beta providers may lead to many misconceptions, all the more that smart beta providers may be unscrupulous.

This research was produced as part of the “ETF and Passive Investment Strategies" research chair at EDHEC-Risk Institute, in partnership with Amundi ETF, Indexing and Smart Beta.