Some 94% of investors responding to EDHEC-Risk Instute’s annual European ETF and Smart Beta Survey said they plan to increase their allocation to smart beta products over the next three years.
They survey, which has been tracking the opinions of 211 European ETF and smart beta investors since 2006, found more and more investors are using smart beta products.
In 2016, around two thirds of respondents (67%) said they invested in smart beta strategies, a significant increase from 49% in 2014. Yet almost all respondents also said they intend to increase allocation to these types of investments over the coming three years.
The key reason investors are particularly interested in smart beta is due to its perceived ability to improve performance and manage risk, with 64% of respondents favouring passive strategies for this due to the lower costs, while 44% used active wrappers.
Respondents also placed particular emphasis on the transparency of the methodology used to replicate a smart beta strategy, as well as the availability of information, which also contributed to the choice of passive strategies over active.
However, the investors surveyed said they wanted to see more smart beta product development in the fixed income and alternative spaces, as well as the development of more customised solutions. This could drive even wider adoption of such strategies.
Professor Lionel Martellini, director of EDHEC-Risk Institute, said: “The survey confirms that transparency and the possibility of making explicit choices on risk exposures are key drivers behind investors’ growing appetite for smart beta. At the same time, the industry yet has to make progress on offering better insights into risks and more flexibility to allow investors to fully exploit the potential of smart beta strategies.”
Outside the smart beta space, 63% of investors revealed plans to increase their use of broader ETFs in future, despite the existing high maturity of the market. This compares to 55% planning to up their allocations in 2014, and 57% in 2015.
The primarily driver for 87% of respondents for the increasing adoption of ETF strategies is lowering investment costs, according to EDHEC.
Since 2006, when the survey began, the increase in the adoption of ETFs by investors has been spectacular – more than double in equities, and more than six-fold in bonds. In 2016, 91% of investors used equity ETFs, compared to 45% in 2006; while 65% of respondents used ETFs for fixed income investing, up from just 10% a decade ago.
Some 71% of respondents said the key reason for using ETFs was to gain broad market exposure, while cost reduction at the same time as tracking the performance of the index has been the main motivation for investment.
Meanwhile, the top concerns for over half the respondents are the developments of products in at least one of the following areas: ETFs based on smart beta indices, multi-factor indices, or single factor indices.