Industry Updates

Investors call on ETF issuers to develop fixed income smart beta products further

Tom Eckett

a man in a suit

Fixed income is the key area in smart beta investors want ETF issuers to develop products further, according to the latest EDHEC Risk-Institute’s European ETF and smart beta factor investing survey.

The annual report found fixed income smart beta and factor investing strategies was the top priority for the 182 respondents, scoring 3.46 to the question “which type of solutions do you think require further product development by providers?” on a scale from 0 (not required) to 5 (strong priority).

Just behind fixed income smart beta was integrating ESG into smart beta products with 3.05 while smart beta in alternatives was third with 2.99.

Fixed income smart beta remains a relatively underdeveloped part of the market with ETF issuers not developing products due to a perceived lack of demand from investors.

Just 13% of respondents currently invest in fixed income smart beta strategies, a 4% drop from last year. Added to this, the question around plans to increase exposure scored just 2.18 while response to the statement there is enough academic research around the area scored 1.73.

Some 38% of respondents said the key reason they do not invest in fixed income smart beta strategies is because “the offer does not correspond to my need in terms of risk factor” while 37.5% said there is not enough academic research around the topic.

In response to ways in which smart beta bond solutions could be useful, some 68% of respondents said for harvesting additional risk premia while 52% said for diversifying equity risks.

Lionel Martellini (pictured), Professor of Finance at EDHEC Business School, and author of the report, commented: “Respondents show a significant interest in fixed income smart beta solutions and plan to increase their investment in this area.

“However, they explain that their usage is limited because the current offer does not correspond to their needs in term of risk factor, and due to a lack of research in the area.”

Overall, the survey found ETF usage is becoming more tactical. For the first time the use of ETFs for tactical allocation was higher (53%) than for long-term buy and hold (51%, a signal the European market is becoming more mature and users are more proactive.

One area where investors want to see more products is SRI ETFs (31%) while 30% said multi-factor ETFs and emerging market equity ETFs.

Martellini concluded: “The results show a true coming of age in investors’ perception and usage of ETFs, which have become mainstream investment instruments for asset owners and are increasingly used in active market, sector-specific but also factor rotation strategies.

“There is a substantial appetite for new development in the area of SRI and fixed-income factor investing, where academically grounded product innovation is still needed.”

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