How do investors select and use ETFs?
EDHEC has just published the results of its 12th European survey
EDHEC has just published the results of its 12th European survey[2] [1] : covering ETFs, Smart Beta strategies and factor strategies. The survey was carried out during the first quarter of 2019, among professional investors with reputations for experience in these types of instruments and strategies (institutional investors, asset management companies, wealth managers), using an online questionnaire. Responses were received from 182 participants in 25 European countries, with a strong representation from the European Union (70% of respondents). These respondents occupy senior positions in their organisations (34% hold executive management positions and 42% are portfolio managers) and manage significant assets (42% of them represent companies managing more than €10 billion in assets).
This study is based on an analysis of the responses received this year, and also compares these results with those obtained over the previous twelve years. In this way, it is possible to assess investors' perceptions of ETFs, factorial and Smart Beta strategies over the years, as well as trends in their use. This year, two trends have emerged from the results of our study: on the one hand, a growing demand for ETFs based on SRI (socially responsible investment) or ethical principles, and on the other, a great deal of interest in Smart Beta solutions involving bond products, even though their use is still moderate.
“The use of ETFs for tactical portfolio allocation is gaining ground, but there is still room for improvement in their use to gain portfolio exposure to more specialised market segments.”
The survey results show that ETFs are now widely used to invest in traditional asset classes. In 2019, 91% of respondents used ETFs to invest in equities, compared with 45% in 2006. For government and corporate bonds, the figure has risen from 13% and 6% in 2006 to 66% and 68%, respectively, in 2019. The role of ETFs is becoming increasingly tactical. For the first time this year, ETFs have been used slightly more extensively in tactical allocation practices, consisting of readjusting the portfolio's exposure to different asset classes from time to time (53% of respondents), than in long-term investment choices (51%). This more balanced use suggests that the ETF market is reaching maturity and that investors are now tending to use ETFs more actively than passively.
Respondents to the survey indicated that their primary use of ETFs is to gain exposure to the financial market as a whole (73% indicate this use). However, there has also been an increase in the use of ETFs to gain exposure to market sub-segments, such as sectors or management styles, which should be seen in the context of the increasingly tactical role of ETFs in portfolio management observed among respondents. ETFs are in fact the instruments of choice for regular portfolio readjustments, given their high liquidity, low transaction costs and the diversity of their support.
Smart Beta and Factorial Strategies: adoption continues to grow with the aim of improving performance
Introduced in 2013, factorial and smart beta strategies now form an important part of our survey. The percentage of respondents who are already investing, or considering investing, in smart beta strategies and factor investing has risen again in 2019, compared with previous years. Whereas in 2013 only 28% of respondents were investing in this type of strategy, this proportion has risen to 51% in 2019. Only 21% of respondents now say they do not plan to invest in these strategies, compared with 36% in 2013. While the proportion of assets devoted to Smart Beta strategies is still limited for a majority of respondents (less than 20% of total assets for 70% of them), almost half of them (45%) plan to increase the proportion of this investment from 10% to 50%.
The use of Smart Beta strategies and factor strategies is mainly motivated by a search for improved investment performance, but also by the possibilities offered by these strategies for better control of portfolio exposure to risk factors. Investment in this type of strategy is made using active solutions for 61% of respondents, 55% use index funds and ETFs and 20% use specialist mandates, with investors able to use one or more of these practices.
Future developments: clear interest in ETFs and Smart Beta strategies based on sustainable investment
As well as providing a snapshot of investors' current practices, our survey also asked respondents about their future investment prospects and what they need to achieve them. 31% of respondents would like to see more SRI-based ETFs developed. Another 30% and 28% respectively would like to see the development of new ETFs based on multifactor indices and Smart Beta indices.
Fixed income products were the first area in which respondents called for further development of Smart Beta solutions. The current limited supply of bonds is undoubtedly holding investors back, given the gap between their interest in this type of investment and their growth prospects. As with ETFs, sustainable investment (ESG criteria, Environment, Social, Governance) is also an area in which respondents to the survey feel there is a need to develop more Smart Beta solutions. They would also like to see more tailor-made solutions developed. The development of new products that meet these requirements will certainly enable Smart Beta solutions to be adopted even more widely by investors.
[1] Le Sourd, V. and L. Martellini. 2019. The EDHEC European ETF, Smart Beta and Factor Investing Survey 2019. EDHEC-Risk Institute Publication (September) : https://risk.edhec.edu/publications/edhec-european-etf-smart-beta-and-factor-investing-survey-2019.
[2] This survey was conducted as part of the EDHEC Risk Institute research chair.« ETF, Indexing and Smart Beta Investment Strategies » supported by Amundi.
