Smart Beta Investors Consider Extra Returns Biggest Benefit

Over a third of investors believe smart beta will perform above and beyond the traditional market cap index, our survey finds

Editor, Europe
Reviewed by: Rachael Revesz
Edited by: Rachael Revesz

When it comes to smart beta, performance rules over all else. Just over a third of the respondents to our survey, conducted between May and June this year, say that the greatest potential benefit of investing in smart beta is the potential to receive higher returns than cap-weighted exposure.

Other important benefits were to deliver less risk than cap-weighted exposure – 21 percent – while 20 percent consider diversification very important in their portfolios. Just 17 percent think that the most important benefit is the potential for returns that have low correlations to traditional, cap-weighted strategies.

Below we outline four other key points that came from our research, driven by a majority of independent financial advisers and mutual fund managers. The survey interviewed 132 people and was sponsored by Deutsche Bank and Brown Brothers Harriman.

Look out for the third and final part of our survey findings tomorrow, which will focus on ETFs and platforms. You can read part 1 here, which discovered that 63 percent of investors plan to increase their use of ETFs.

1) Investors Want Multi-Asset ETFs

Tellingly, 47 percent and 45 percent of respondents are clamouring after more multi-asset and alternative ETFs respectively, which could be borne out of investors' current need for new ways to protect their portfolios from volatility. That interest in new launches diminishes to 22 percent for commodities and 25 percent in fixed income.

When asked to rank the strategies they want to see more of in the market, investors overwhelmingly voted for sector-specific funds at 49 percent, followed by smart beta at 39 percent. Again, multi asset was popular at 31 percent.

Fixed income lagged the tables at 18 percent, despite all the news headlines of increased bond volatility and new launches from providers.


2) Physical Replication Wins

This result was hardly a surprise, judging by recent moves of ETF issuers like db X-trackers and UBS to switch their funds from synthetic to physical replication. In our survey, 61 percent prefer physically replicated ETFs, and just 5 percent opt for swap-backed structures. However, a significant chunk - just over a third – have no preference.

3) An ETF Is Just As Liquid Or Illiquid As Its Underlying Market

The eternal debate – how do you measure an ETF’s liquidity?

The vast majority of investors who answered the survey judge the liquidity of the underlying market to be most important factor, followed by the bid/offer spread and the fund size. The average frequency of trades on exchange and the number of authorised participants that work with the ETF issuer were ranked less highly.

4) Investors Are Patient With New Launches

There’s no rush when it comes to investing in new funds, as demonstrated by our research. The majority of respondents – 45 percent – wait between 4 months to a year before investing in a new fund, with 22 percent waiting two to three years. Just 13 percent would invest immediately.

On the same topic, over half the respondents would wait to see between €50 and €100 million of assets gathered before investing in a new fund. Although, interestingly, 13 percent said that asset level is not important.

Rachael Revesz joined in August 2013 as staff writer. Previously an investment reporter at Citywire, she has a background in writing content for retail financial advisors and has covered a wide range of subjects in finance. Revesz studied journalism at PMA Media, which has since merged with the Press Association. She also holds a B.A. in modern languages from Durham University, as well as CF1 and CF2 financial planning certificates from the CII.