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Concerns remain on transparency of smart beta ETFs

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A survey of investment professionals conducted as part of the Amundi ETF & Indexing research chair at EDHEC-Risk Institute on “ETF and Passive Investment Strategies,” has solicited the views of European ETF investors on “smart beta” ETFs.

The results have been compiled into a study entitled “Investor Interest in and Requirements for Smart Beta ETFs.”
 
The Institute reports three key findings. The first is that those who have invested in smart beta ETFs are pleased overall: about three-quarters (74 per cent) of smart beta ETF users declare that they are satisfied with them. Further, when asked about their list of top priorities for future product development in the ETF space, smart beta ETFs dominate the list of top items mentioned by investors.
 
In fact, among investors’ six biggest priorities, four concern indices relating to smart beta approaches, namely smart beta equity (37 per cent), equity factor (31 per cent), equity style (29 per cent), and smart beta bond (25 per cent).  A considerable share of investors still have concerns about these types of products.
 
The Institute says: “In attempting to capture factor premia through investment in smart beta ETFs, the predominant conditions that investors put forward are: ease of implementation, low turnover and transaction costs (3.66 on a scale from 0 to 5); a rational risk premium (3.61); and documentation of the factor premium in empirical literature (3.45).
 
One of the investors greatest concerns was the lack of transparency. The Institute reports that a greater share of respondents (88 per cent) than for all other statements about smart beta indices agrees that smart beta indices require full transparency on methodology and risk analytics. “Transparency is not only the best protection against the risks arising from conflicts of interests, but it is also instrumental to improving the informational efficiency of the indexing industry. This result comforts the position of EDHEC-Risk Institute, which is continually advocating for improvements in index transparency.”
 

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