Investors need ethical ETFs and fixed-income smart beta solutions

Investors have shown a growing demand for socially responsible investing (SRI)/ ethical exchange traded funds (ETFs) and interest in fixed-income smart beta solutions, according to EDHEC European ETF, smart beta and factor investing survey.

The study, which had been conducted since 2006 and aimed to provide insights into European investors’ perceptions and plans in the domain of ETFs and smart beta, found that ETF usage was becoming increasingly mainstream, with the number of respondents who used ETFs to invest in equities grow from 45% in 2006 to 91% in 2019.

Investors also decided that ETF usage was becoming more tactical and helped achieve broad market exposure as 74% of respondents said they were using ETFs frequently for this purpose.

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Also, about two-thirds of respondents used ETFs to invest in smart beta in 2019 compared to 49% in 2014.

According to the survey, the key objectives driving the use of smart beta and factor investing strategy were improved performance and the belief that that the three typical factors of the credit risk market, namely carry/level of the yield curve, credit and slope of the yield curve, were. the most relevant in fixed-income markets.

Commenting on the future developments in ETFs and smart beta products, 31% respondents said they wanted to see more SRI-based ETFs and indicated that fixed income, ESG and alternative asset classes were the smart beta solutions which required further development by providers.

Also, respondents showed a significant interest in fixed-income smart beta solutions and planned to increase their investment in this area. However, they explained that their usage was limited as the current offer did not correspond to their needs in term of risk factor, and due to a lack of research in the area.

The cumulative percentage of those that already invested or were considering investing in smart beta and factor investing in the near future was still higher in 2019 (79%) than in 2018 (74%).

Commenting on the results of the survey, professor Lionel Martellini, director of EDHEC-Risk Institute, said the survey: “shows 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,” he said.

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