A year of take-off for smart beta
Francois Millet (pictured), head of ETF and index product development at Lyxor says that 2016 has been the year of true take-off for smart beta in the ETF space. Millet reports that end of September saw EUR25 billion in assets in smart beta ETFs for Lyxor in Europe, with some EUR6.5 billion in flows.
The smart beta ETF offering from Lyxor comes in three categories: risk-based which has proved the most popular, especially with minimum volatility strategies; fundamental and factor allocation, where products offer either single or multi factor investing options. This last category is the youngest and fastest growing.
Of the total flows into smart beta of EUR6.5 billion, EUR2.7 billion is into the risk based pot with minimum volatility and variance, equally weighted type products. EUR1.9 billion has gone into the fundamental indexation with high dividend strategies and EUR1.8 billion has gone into factor allocation products, either low volatility, beta, value or multi factors.
Millet says: "Out of that EUR1.8 billion category, you have half in multi-factor products. People are not sufficiently equipped or autonomous in terms of macro signals to market time themselves, so they look for immediate diversification and turn to multi-factor products."
The audience for these products are private banks and other institutions who understand the benefits of getting back to equities with a minimum variance or low volatility.
Among the flows, the EUR2.7 billion into minimum volatility products is driven by the expensive US market, Millet says. "The volatility regime has changed since July 2015. We are in a system where the historical volatility is above 15 per cent which is much higher. Volatility can get down to low levels but there are plenty of spikes, such as August 2015, January of this year or June with a strong spike with Brexit. We are seeing periods of calm and then brutal spikes in volatility which is why people are interested in keeping their exposure to equities but changing to minimum volatility or minimum variance."
Millet reports that fear and the high valuations of the markets are driving the growth of smart beta ETFs. "There is still a stream of people looking for income generation," he says.
"People are not any more picking high dividend stocks just for yields because they know it is dangerous and they will be exposed to dividend traps. You need to be careful as you need sustainability of dividends."
Millet reports that people are turning to equities as fixed income substitutes, looking for streams of income outside the bond world. "It's a good idea but you need to manage it," Millet says.
The trend for factors is a long term trend, Millet says. "We emphasise the need for local factor selection. There are significant differences in the approaches to multi-factor investment. One of the key differences is the way you are measuring the factors."
Lyxor partners with JP Morgan in the development of their multi and single factor ETFs. "We share the research vision and use local factors not built on a global scale," Millet says, giving the example of the automotive industry and an attempt to measure a value factor between GM and Toyota. "It will be skewed to Japan because the size of the Japanese company's balance sheet will be bigger. You are not measuring apples with apples," he says.
"We prefer to capture the value factor within each country as factors are local," Millet says