Investors expect disclosure of transaction costs
Investors expect that the providers of exchange traded funds (ETFs), indexing and smart beta investment strategies should better disclose the estimated level of transaction costs generated by their strategies, according to a study conducted as part of the Amundi research chair at EDHEC-Risk Institute.
The “Smart Beta Replication Costs”, which analysed the impact of transaction costs on the performance of systematic equity strategies, found that providers often failed to make reference to transaction costs and only reported gross returns, forcing investors to figure out the exact amount of such costs.
The study also aimed to provide the estimate of the costs applied to a range of smart beta strategies while analysing the impact of different implementation rules, which would allow for the ability to contrast the transaction costs of smart beta strategies and the gross returns of such strategies.
As far as the replication costs estimates are concerned, the study found that:
- Transaction costs and implementation challenges crucially depend on the stock universe;
- Practical implementation rules effectively ease liquidity and cost issues which meant that whether or not smart beta strategies faced implementation hurdles depended on the set of implementation rules; and
- Smart beta performance benefits largely survive transaction costs.
Amundi’s global head of ETF, Indexing and Smart Beta Management, Laurent Trottier, said: “Efficient Index replication requires strong skills, a deep understanding of the underlying indices and a strict implementation framework”.
“We welcome this research paper which will contribute to a better understanding of smart beta index replication challenges and help enhance transparency at an industry level.”
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