'Smart' ETFs: Don't Run Before You Can Walk

Providers of 'smart beta' ETFs consider their products to be hot stuff but most investors are far from understanding such strategic tools

Jose Garcia Zarate 23 April, 2014 | 12:00PM
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You'd think that with "smart beta" hitting the headlines almost on a daily basis, most exchange-traded-product (ETP) investors would be pretty familiar with the concept. Well, you'd be wrong. According to the results of an Investment Trends survey conducted among users of Morningstar services (e.g. self-direct retail investors and IFAs using Morningstar.co.uk and/or Morningstar software), the level of ignorance about "the hottest ticket in ETP town" is quite staggering.

To the question "How familiar are you with smart beta strategies?" a whopping 49% of self-direct investors taking part in the survey responded with a "this is the first time I've heard about smart beta", while 26% said they’d heard the term before, but were not familiar with it. The responses from the IFA community were equally revealing, with 24% of respondents declaring they'd never heard about smart beta before and 44% saying they'd heard of it but didn't know much about it.

Perhaps this shouldn't come as much of a surprise. In fact, if anything, the survey's results are broadly reflective of the realities of a European ETP market that continues to be dominated by institutional investors. Indeed, although growing, the take-up of ETPs amongst retail investors and IFAs in Europe – estimated at 10-20% and with wide variations amongst individual countries – remains low in comparison with that of the US, where non-institutional investor participation has been routinely reported at, or above, the 50% mark for a number of years now.

The same survey also revealed that, both amongst self-directed investors and IFAs, the main barrier stopping them from using ETPs in general (not only smart beta ETPs) is a sheer lack of knowledge about the products.

In a way, the results of this survey serve as a bit of a warning to ETP issuers and any media outlet reporting on the ETP market in Europe. For all the time that we devote to talk about smart beta and other advanced developments in ETP construction, we should never overlook that there is a very large proportion of potential ETP investors that, at this stage, would probably be better served by reinforcing the educational efforts on the very basics of ETP investing.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Jose Garcia Zarate

Jose Garcia Zarate  is Associate Director of Passive Strategies Research for Morningstar Europe