The EDHEC European ETF Survey 2014 Felix Goltz Head of Applied Research, EDHEC-Risk Institute, and Research Director, ERI Scientific Beta This research has been carried out as part of the Amundi ETF& Indexing Amundi ETF & Passive Investment Strategies Research Chair 24 March 2015
Introduction ETF industry has undergone rapid growth since the first European ETF was traded in 2000. Assets under management of ETFs and other exchange traded index products amounted to $438 billion at the end of December 2014 (ETFGI 2014). The ETF market is still growing. Whereas the first ETFs were dedicated to broad equity markets, ETFs now exist for a wide range of assets classes including fixed-income, currencies and commodities.
Introduction A key advantage of employing a survey methodology rather than a market study is that we obtain direct information from market participants concerning: instruments they currently use; how these instruments fit into their overall investment process; how users evaluate these instruments. The survey methodology also provides: information concerning future plans of investment professionals; an outlook of likely future industry developments; whereas market study only provides information on current products and on current market size.
Introduction The EDHEC European survey 2014 was conducted from 2 nd October 2014 to 19 th November 2014 with an online questionnaire and was diffused to European professionals in the asset management industry. The responses were collected from 222 respondents, that together have at least 3,350 billions of AUM. Respondents were from 27 European countries. Almost half of respondents (47%) were from UK, Switzerland and France, the other 53% being distributed between 24 European countries.
Introduction 78% of respondents institution main activity is institutional investment and about 19% of respondents belong to the private wealth management industry. A large share of respondents occupy highranking positions: 17% are board members and CEOs; 32% are directly responsible for the overall investments of their company (CIOs, CROs, or Heads of Portfolio Management); Another quarter of the survey participants are portfolio or fund managers.
1. Rates of Usage and Satisfaction of ETFs Continuing growth in the ETF market This exhibit indicates the use of ETFs or ETF-like products for different asset classes over time. The percentages are based on the results of EDHEC ETF survey 2006, 2008 to 2014. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2006 2008 2009 2010 2011 2012 2013 2014 To the exception of hedge funds and infrastructure, we observe that all rates of use remain quite high. ETFs in the alternative investment universe must deal with illiquid underlying assets. As a result, ETFs must usually rely on liquid proxies of the asset class that can only approximate the price movements in these asset classes. For example, infrastructure ETFs invest in stocks or indices from only three clusters: energy, transportation, and utilities (Fuhr and Kelly, 2009). Equities Government bonds Corporate bonds Commodities Real estate Hedge funds Infrastructure
1. Rates of Usage and Satisfaction of ETFs High satisfaction with ETFs This exhibit indicates the percentages of respondents that are satisfied with ETFs or ETF-like products for different asset classes over time. The percentages are based on the results of EDHEC ETF survey 2006, 2008 to 2014. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2006 2008 2009 2010 2011 2012 2013 2014 Satisfaction with standard ETFs has remained at high levels. The less liquid and less mature ETF markets experience the most varying levels of satisfaction (hedge funds, infrastructure, real estate). As for infrastructure, real estate ETFs must rely on liquid proxies of the asset class that do not totally reflect the asset class. They usually replicate real estate indices that are based on real investment trusts (REITs), listed collective investment vehicles that provide relatively high liquidity. Equities Government bonds Corporate bonds Commodities Real estate Hedge funds Infrastructure
2. Perspective of further increase in the use of ETFs This exhibit indicates the future potential to change each of the mentioned products by investors over time. The percentages are based on the results of EDHEC ETF survey 2006, 2008 to 2014. 100% Increase 80% Stay the same 80% 60% 50% 40% 30% 20% 10% 60% 40% 20% 0% 2006 2008 2009 2010 2011 2012 2013 2014 ETFs Futures Total return swaps Index funds Decrease 40% 20% 0% 2006 2008 2009 2010 2011 2012 2013 2014 ETFs Futures Total return swaps Index funds It appears that ETFs investors are still looking to increase (about 60% of them since 2011) or at least to maintain their use of ETFs and have a more favourable outlook of their use of ETFs than of their use of alternative indexing products. 0% 2006 2008 2009 2010 2011 2012 2013 2014 ETFs Futures Total return swaps Index funds
2. Perspective of further increase in the use of ETFs - Motivations 64% of respondents declare that increasing the use of ETFs will serve as a substitute to the use of active managers; 42% of them will substitute ETFs to the use of other index products. This replacement will first of all be motivated by costs for a vast majority of respondents (70%), but also by performance (45%), while liquidity and transparency are the last criteria given (38% and 37% of respondents, respectively). Incrase in the use of ETFS will serve as... Motivations for increasing the use of ETFs 70% 60% 50% 40% 30% 20% 10% 0% 42% A substitute to the use of other index products 64% A substitute to the use of active managers 8% Non response 80% 70% 60% 50% 40% 30% 20% 10% 0% 70% 45% 38% 37% 7% Costs Performance Liquidity Transparency Non response
3. High quality tracking of ETFs This table indicates the average scores which ETFs, futures, TRS and index funds received from respondents based on the eleven criteria. For each particular quality, grade 1 to 3 were given for answers of poor to very good and the average score was calculated based on the number of responses who have rated that question. The familiarity percentages were obtained by using (1- non-responses). Investors perceive ETFs to generally offer high tracking quality, with 97% of respondents evaluating ETFs tracking error as very good or fairly good. ETFs Futures TRS Index Funds QUALITY Liquidity 2.51 2.76 1.75 2.26 (99.4%) (96.1%) (62.7%) (88.0%) Cost of liquidity 2.21 2.67 1. 84 2.21 (91.1%) (92.7%) (73.6%) (92.1%) Other cost 2. 28 2.62 1.87 2.13 (92.2%) (93.3%) (73.6%) (92.1%) Tracking error 2.37 2.54 2.40 2.35 (97.2%) (96.6%) (93.6%) (94.2%) Product range 2.65 2.00 2.04 2.05 (99.4%) (79.9%) (79.3%) (85.4%) Transparency 2.42 2.67 1.94 2.22 (95.4%) (93.8%) (74.6%) (85.6%) Minimum subscription 2.71 2.15 1.68 2.27 (97.7%) (86.1%) (61.3%) (92.6%) Operational constraints 2.58 2.13 1.59 2.29 (97.1%) (83.0%) (46.6%) (91.8%) Regulatory regime 2.45 2.42 1.76 2.47 (96.0%) (93.7%) (64.2%) (97.1%) Tax regime 2.12 2.23 2.10 2.18 (89.5%) (90.5%) (88.1%) (94.1%) Control of counterparty 2.19 2.53 1.70 2.36 risk (91.0%) (92.4%) (59.0%) (94.3%) Average score 2.41 2.43 1.88 2.25
3. High quality tracking of ETFs This exhibit indicates the percentages of respondents frequently using ETFs for each of the mentioned purposes over time. The percentages are based on the results of EDHEC ETF survey 2009 to 2014. 0.8 0.7 0.6 Arbitrage transactions to benefit from mispricing of other assets relative to the ETF Neutralisation of factor exposures of other investments Access to tax advantage 0.5 0.4 0.3 0.2 0.1 Dynamic portfolio insurance strategies (e.g., CPPI) Management of cash flows (e.g., cash equitisation) Tactical bets Short-term/dynamic investment Specific sub-segment exposure (sector, style) Long-term/buy-and-hold investment 0 2009 2010 2011 2012 2013 2014 Broad market exposure The decrease through years (10% in 2010, 5% in 2012, 0% since 2013) in the frequent use of arbitrage trading between ETFs and the underlying basket of cash securities suggests that respondents perceive ETF pricing relative to NAV to be precise. It appears that investment in ETFs is mainly associated with a longterm exposure to broad market indices.
3. High quality tracking of ETFs This exhibit indicates how frequently respondents watch information on ETFs to gain access to information about the underlying securities and thus indirectly examines the efficiency of the ETF market against the underlying markets. Very often 4% Often 20% Sometimes 30% Rarely 28% Never 19% 0% 5% 10% 15% 20% 25% 30% 35% Slightly more than half of respondents (54%, obtained as the sum of very often, often and sometimes) watch information on ETFs frequently instead of doing that directly on the underlying market. This result contributes to suggest that ETFs are having an increasing positive impact on price efficiency of financial markets.
4. Perceptions about Smart Beta ETFs The success of passive smart beta products This exhibit indicates the percentages of respondents that reported to use products tracking smart beta indices. 35% 25% My organisation is investing in such products My organisation is considering investment in such products in the near future 40% My organisation is not investing and not considering investment in such products in the near future A quarter of respondents (25%) already use products tracking smart beta indices; and two-fifth of them (40%) consider investing in such products in the near future.
4. Perceptions about Smart Beta ETFs Smart, emerging and factor are the demand This exhibit indicates how many respondents would like to see further development in the future for different ETF products. Respondents were able to choose more than one product. It appears that among the six biggest priorities seen by investors, four concern indices relating to smart beta approaches: smart beta equity (37%), equity factor (31%), equity style (29%) and smart beta bond (25%); the remaining two items concern emerging market ETFs for stocks (43%) and bonds (27%). Equity emerging market ETFs 43% ETFs based on smart beta indices 37% ETFs based on factor indices Equity style ETFs Emerging market bond ETFs ETFs based on smart bond indices Commodity ETFs Corporate bond ETFs Volatility ETFs High yield bond ETFs 31% 29% 27% 25% 23% 23% 23% 23% Real estate ETFs Ethical/SRI ETFs Infrastructure ETFs Hedge-fund-like ETFs Currency ETFs 18% 16% 15% 15% 14% Actively managed equity ETFs 9% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%
4. Perceptions about Smart Beta ETFs Motivations for investment in smart beta ETFs This exhibit indicates the percentages of respondents that agree or strongly agree with the statements about smart beta indices. Diversification across several weighting methodologies allows risk to be reduced and adds value Smart beta indices require full transparency on methodology and risk analytics Smart beta indices allow the concentration of cap-weighted indices in very few stocks or sectors to be avoided Smart beta indices allow factor risk premia such as value and small cap to be captured Smart beta indices provide significant potential to outperform cap-weighted indices in the long term 81% 88% 81% 82% 71% 19% 12% 19% 18% 29% 0% 20% 40% 60% 80% 100% Agree Disagree 71% of respondents think that smart beta indices provide significant potential to outperform cap-weighted indices in the long term. 81% of respondents think that they avoid cap-weighted indices being concentrated in very few stocks or sectors. 82% of respondents agree that smart beta indices allow factor risk premia, such as value and small cap to be captured. An even greater share of respondents (88%) agree that smart beta indices require full transparency on methodology and risk analytics.
4. Perceptions about Equity factors A consensus on rewarded factors Respondents were asked about their appreciation of the different factors inherent to equity strategies. None of the 7 factors proposed to respondents obtained a poor score. On a scale from 0 (no confidence that the factor will be rewarded) to 5 (high confidence that the factor will be rewarded), the average scores of the factors range from 2.89 (low volatility factor) to 3.39 (value factor). Value (3.39) and small cap (3.22) are the two factors considered by respondents are the most likely to be rewarded. Respondents were not asked about factor quality. Factors Confidence level that factor will be rewarded Confidence level that factor will be rewarded after accounting for transaction costs and other implementation hurdles Not familiar with this factor Value 3.39 3.10 4.07% Small Cap 3.22 2.89 6.40% Dividend Yield 3.09 2.88 5.23% Profit 3.02 2.78 7.56% Momentum 2.96 2.66 5.23% Liquidity 2.91 2.56 5.81% Low Volatility 2.89 2.66 5.23%
4. Perceptions about Equity factors Requirement about factors Respondents have some requirements to consider the selection of a given set of factors in their investment approach. First of all, they are concerned by ease of implementation and low turnover and transaction costs with a score of 3.66 on a scale from 0 (not important) to 5 (absolutely crucial). The second requirement is rational risk premium (score of 3.61) Also important to them is that factor premium should be documented in extensive empirical literature (score of 3.45). Requirements Score Factors should be easy to implement with low turnover and transaction costs 3.66 Factor premium should be related to rational risk premium, i.e. explained by a substantial risk 3.61 that the factor pays off badly in bad times Factor premium should be documented in extensive empirical literature 3.45 Factors should be related to firm fundamentals 3.04 Factors must be orthogonal 3.03 Factor premium has been explained as an "anomaly" allowing rational agents to profit from 2.78 irrationality of others Factors should be related to macroeconomic variables 2.77
Conclusion This survey shows that there is still a bright future for further developments of ETFs (55% of respondents plan to increase their use of ETFs). The area of most interest to respondents in terms of product developments appears to be innovations in traditional asset classes, with demands on ETFS based on smart beta equity (37% of respondents), factor investing (31% of respondents), equity style (29% of respondents) and smart beta bond (27% of respondents). There is less perspective of development in new asset classes (real estate, infrastructure, hedge funds), not necessarily suited to these supports.
Appendix: Country distribution of respondents This exhibit indicates the percentages of respondents that have their activity in each of the mentioned countries. Percentages are based on the 222 replies to the survey. 3% 2% 2% Other EU 4% 4% 24% Switzerland UK 6% France Germany 7% Italy Luxembourg 11% 18% Non-EU Ireland 18% Netherlands Spain
Appendix: Main activity of respondents This exhibit indicates the distribution of respondents according to their professional activities. Percentages are based on the 222 replies to the survey. 3% 19% 27% Asset owners (i.e. pension fund, insurance company) Other institutional investment managers Private Wealth Management Other 52%
Appendix: Function of respondent survey This exhibit indicates the distribution of respondents based on their position held in the company. Percentages are based on the 222 replies to the survey. 4% 5% 4% 2% 15% Supervisory Board Member CEO/Managing Director/President CIO/CFO/Treasurer 10% CRO/Head of Risk Management 3% 8% Head of Asset Allocation/Head of Portfolio Management Portfolio Manager/Fund Manager 6% Vice President Associate/Analyst 25% 18% Marketing Position Independent/Private Client Non response
Appendix: Asset under management (EUR) This exhibit indicates the distribution of respondents based on their asset under management which they reported. 30% 27% 25% 20% 20% 19% 15% 14% 10% 10% 10% 5% 0% <10mn 10-100mn 100mn-1bn 1-10bn 10-100bn >100bn