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HANetf research reveals European investor demand for ETFs focusing on income and upside enhancement for defined outcome strategies

HANetf has conducted market research in order to establish potential demand for ‘defined outcome’ strategies in the ETF wrapper. 

The firm writes that these types of investment products have largely been provided through structured products in Europe. 

Over the last few years these strategies have become increasingly popular through the ETF model in the US markets. HANetf  reports that it has received multiple requests from asset managers and banks to provide such ETFs as part of its platform and this market research has been used to validate the potential demand. 

Income enhancement and upside enhancement are the most in-demand defined outcome strategies among professional investors. The research led by Pure Profile during the month of June 2021 among 100 professional investors including institutional investors, hedge fund investors and managers, fund managers, IFAs and wealth managers across the UK, Germany and Switzerland, found that 68 per cent have identified immediate or future needs for income enhancement strategies, which is unsurprising given the current low-rate environment. This was closely followed by 63 per cent for upside enhancement strategies.

Around 53 per cent say they have immediate or future needs for volatility target strategies while 46 per cent are focused on opportunities for capital protection or floor strategies and 35 per cent on downside or buffer strategies.

According to the research, 93 per cent of investors said that the wrapper, such as a bank note or certificate, prevented them from considering defined outcome strategies and some 79 per cent would contemplate using ETFs when considering securing downside protection exposure. 

About 21 per cent said they have a preferred structure such as a certificate or note from a bank.  This appears to reflect the inherent credit risk of the issuer of the note which is usually unsecured credit versus ETFs that are bankruptcy remote and hold physical assets or collateral. Another interesting point was that 60 per cent of investors thought that tax features of structured notes were an important feature.

The study highlighted how widespread use of equity-based defined outcome or structured payoff strategies have been over the past five years, with 59 per cent of professional investors having bought upside enhancement and 58 per cent purchased income enhancement strategies.

HANetf writes that this reiterates the earlier point on future demand for these two strategies. Also 56 per cent of the investors surveyed said allocations to defined outcome or structured payoff strategies have typically been between 5 and 10 per cent and further 16 per cent greater than 10 per cent allocation which again seems encouraging, the firm says.

The most popular benchmarks for defined outcome strategies identified by the research were the Euro Stoxx 50 chosen by 54 per cent followed by the S&P 500 on 48 per cent and the FTSE-100 on 44 per cent. Just 19 per cent said the MSCI World was their preferred benchmark.

Hector McNeil, Co-CEO of HANetf, says: “The structured products markets globally is a huge market worth more than USD7 trillion and on a par with the global ETF market so it makes sense that investors are happy to consider defined outcome ETFs and that ETF issuers are looking at the market. This is especially attractive for end investors who prefer the reduced counterparty risks ETFs offer versus structured products.

“Eight out of 10 professional investors would consider ETFs for downside protection and that most investors are not concerned about the wrappers when looking at defined outcome strategies.

“Innovation is central to the expansion of the ETF market globally and HANetf is committed to constantly expanding the options for investors by bringing new products and investment solutions to market.”

Around 84 per cent of investors said defined outcome strategies would typically make up less than 10 per cent of their portfolio. 


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