Bringing you live news and features since 2013
Bringing you news, views and analysis since 2013

9785

EDHEC-Risk’s annual European ETF Survey reveals investor attitudes to risk, replication and asset allocation

RELATED TOPICS​

EDHEC-Risk Institute has announced the results of the EDHEC European ETF Survey 2011, which represents a comprehensive survey of 174 European ETF investors. The survey was conducted as part of the Amundi ETF research chair at EDHEC-Risk Institute on “Core-Satellite and ETF Investment.”

In relation to the issues raised by financial authorities and international organisations on ETF risks, the survey suggests that investors have a differentiated view on different replication methods, taking several dimensions into account such as cost, tracking error, and accessibility of broad indices, among others, when making choices on the preferred replication mechanism. Depending on the objectives at hand, different replication mechanisms are perceived to have different types of benefits.

Industry communication on the risks of ETFs has led to the counterparty risk of physical ETFs being underestimated. As a result, investors think that full physical replication (a positive score of 2.28 out of 3) is less risky than synthetic replication (1.41 out of 3) in terms of counterparty risk. Even though almost all physical replication ETFs engage in securities lending, investors fail to appreciate the risk of this activity, giving full replication a score of 2.11 out of 3 for operational risk caused by securities lending, compared to 1.55 out of 3 for synthetic replication, even though synthetic replication ETFs do not use securities lending directly.

In general, respondents prefer full replication over either sampling replication (where the index is replicated physically with a limited number of securities) or synthetic replication, but there is a clear preference for synthetic ETFs to replicate indices in challenging universes, such as illiquid alternative asset classes and broad indices with more than 1,000 constituents

Overall, in terms of reliability, coverage, cost and risk, though all three approaches are comparable, synthetic replication receives a slightly higher average score (2.12 out of a possible 3.00) compared to full replication (2.01) and sampling replication (2.01).

Investors acknowledge that the current education on the differences between highly regulated ETFs and largely unregulated ETPs needs to improve in order to avoid confusion.

While investors are using ETFs more heavily for dynamic strategies and specific sub-segment exposure than in the past, the main use of ETFs remains long-term buy-and-hold investing in broad market indices.

Investors are also moving towards applying ETFs for portfolio optimisation and risk management, and continue to see ETFs mainly as index-replicating products, rather than active funds.

ETFs are mainly used as beta or asset allocation tools, thus allowing investors to focus on the first-order issue of beta management, rather than on stock picking issues, which are only of third-order importance.

There has been increasing demand for ETFs based on new forms of indices, from 29% to 39% over the past year, which indicates growing interest in alternative-weighted indices.

ETFs remain very popular for passive investment. In terms of future use, a majority of respondents (63%) indicate that they intend to increase their allocation to ETFs in the future.

Respondents also intend to increase their investment in futures, while they expect their use of traditional index funds to stay stable on average and that of total return swaps to decrease.

 

Latest News

Enthusiasm for climate-conscious investment strategies will grow in 2024 according to Invesco. At an event..
The Global Returns Project (GRP), a UK-registered charity aiming to make it easy to donate..
Bloomberg and General Index (GX) have announced the expansion of their strategic collaboration which builds..

Related Articles

Juan Nozal, Mapfre Asset Management
Juan Nozal, Fixed Income Portfolio Manager at MAPFRE Asset Management, talks about the outlook for fixed income assets over 2024, in what he predicts will be an outstanding year for this asset class...
Juan Nozal, Fixed Income Portfolio Manager at MAPFRE Asset Management, talks about the outlook for fixed income assets over 2024,..
n response to the increased attention to climate change risk, institutional investors, asset managers, and asset owners in the US are committed to implementing a variety of measures to address climate change and reach their net-zero goals, according to Cerulli Associates...
n response to the increased attention to climate change risk, institutional investors, asset managers, and asset owners in the US..
Lord Hollick, House of Lords
A House of Lords committee has raised “significant concerns” over the role of UK regulators, their ability to operate with genuine independence from government and how they are held to account...
A House of Lords committee has raised “significant concerns” over the role of UK regulators, their ability to operate with..
Rob Edwards, Morningstar
The complexities of assessing performance from responsible investment strategies have been laid bare after Morningstar’s ESG indices delivered a mixed bag in 2023...
The complexities of assessing performance from responsible investment strategies have been laid bare after Morningstar’s ESG indices delivered a mixed..
Subscribe to the Institutional Asset Manager newsletter

Subscribe for access to our weekly newsletter, newsletter archive, updates on the site and exclusive email content.

Marketing by