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Georg Elsaesser, Invesco

Invesco forecasts factor ETF use to increase by close to half over next three years


According to the latest Global Factor Investing Study from Invesco, almost half, at 46 per cent, of institutional investors expect to increase the use of factor ETFs in their factor allocations over the next three years.

That figure is up from 31 per cent over the previous three years. None said they expect to decrease the use of factor ETFs.

Invesco’s study incorporates the views of 130 institutional investors and 111 wholesale investors – all already investing in factor strategies – collectively responsible for over USD31 trillion in total assets. Wholesale investors also remain favourable towards factor ETFs, found the report, with 43 per cent saying they expect to increase use of ETFs in factor allocations over the next three years.

“The research has found continued momentum around factor ETFs. For some investors, ETFs act as the cornerstone of an entire strategy. Others use them tactically, or as portfolio completion tools. This wide range of use-case explains why institutional use of factor ETFs is accelerating particularly rapidly, with around half planning an increase in ETF use,” says Georg Elsaesser, Senior Portfolio Manager, Quantitative Strategies at Invesco.

Nearly half (46 per cent) also said they would be more likely to invest in a factor ETF if it incorporated ESG. However, the intersection of ESG and factor investing was seen to not yet yield a wide enough supply of ETF products – with 49 per cent of asset owners agreeing they sometimes struggle to find the right factor ETF to suit their needs.

In addition, while more than two fifths (45 per cent) of investors said the low yield environment has made the use of factors within fixed income portfolios more attractive, offering an opportunity for additional sources of return and diversification, use of fixed income factor ETFs remains less than equity products.

For wholesale investors the limited availability of fixed income ETFs is seen as the largest challenge to uptake, while for institutional investors data and technology shortcomings are more notable. Invesco’s study found that while equity factor portfolios are more likely to be invested via ETFs than the overall equity portfolio (26 per cent vs 20 per cent), the reverse is true for fixed income (11 per cent vs 18 per cent). 

Elsaesser says: “While factor ETFs have expanded and grown, there is significant unmet demand and a need for further product development in fundamental areas such as fixed income and ESG. Indeed, the fact that nearly half of respondents would be more likely to invest in a factor ETF if it incorporated ESG clearly underscores a compelling market opportunity.”

Overall, this year’s study found factor allocations had continued to rise across both ETF and non-ETF products. Some 43 per cent of respondents upped allocations over the past year, with the ability to better control sources of risk and the possibility of increased returns key drivers of adoption. 

Rising allocations to value emerged as a strong trend, with 42 per cent of investors having increased their allocation to the factor in the previous 12 months. Almost half (48 per cent) agreed that they were increasing their allocation to value in preparation for a post-pandemic recovery. 

In addition, the rapid uptake of a multi-factor approach has seen factor investing become more dynamic. Only 22 per cent of factor investors look to keep factor exposures completely fixed, while around half (48 per cent) said they use an approach allowing for variation in exposures over the long run and a third change their exposures regularly. The dynamic approach is set to accelerate, with 41 per cent expecting to be more dynamic over the next two years. 

Elsaesser says: “The post-pandemic period tested some of the assumptions around the benefits of factor investing. However, most investors report that adopting a factor approach has been successful and there has evidently been a strong uptake towards factor investing strategies, including through the use of ETFs. The growing allocation reflects a broader adoption as investors consider factors in the context of the whole portfolio and in asset classes beyond equities.”

Elsaesser says that he is not surprised by the findings of the study. “There has hardly ever been a surprise and if there was it was always a positive surprise in the past.” 

He reports that feedback from conversations with investors is that there is very high and still rising confidence in factor-based investing strategies. “Between 2018 and 2020 factor investing had a hard time and that was a test, but the positive finding was that the majority of factor investors stuck to their guns and still trust factors in the same way that they did.”

ESG is, as Elsaesser phrases it, ‘the hottest topic in town’. “There is demand for it in all types of portfolios whether institutional or retail and all types of institutions want ESG. The really smart thing about a dedicated factor portfolio is that you overweight your factors such as value and momentum and seek to neutralise other risks so that your factors determine return and risk expectations.”

He explains: “If I can manage to have two different equity funds with bad and good ESG with the same overweight in the factors and these are the determining elements for risk and return, I can maintain my risk and return statements.”

It is different in fixed income, he notes. “In equities, it’s more about handling a reduced investable universe but in fixed income, the story is different as ESG tends to introduce a bias towards lower yielding bonds with higher credit quality in the portfolio. Introducing ESG can change your overall portfolio’s expected returns, but you can add higher yielding factors such as carry and value to readjust the ESG portfolio and bring you back to the desired characteristics.”


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