ETF Research & Solutions

So far in 2016, we’ve seen a large amount of net inflows into minimum-volatility ETFs as investors seek shelter in lower-risk stocks. These smart beta ETFs are designed to target the factor premium that has been attributable to favoring lower-risks stocks over their higher-risk counterparts.

Recent press, articles, and whitepapers have sharply criticized the minimum-volatility trade, and some have said that the higher valuations associated with these types of stocks are evidence of overcrowding by investors. This type of behavior suggests the premium investors harvest for owning such securities is likely to come tumbling down sooner rather than later.

Like all investment strategies, minimum volatility cycles through outperformance and subsequent underperformance over periods of time. Based on the conditions described above, should investors be thinking about rotating back out of minimum-volatility ETFs?

For most investors, portfolio construction is more important than portfolio positioning. This is because a retirement portfolio positioned for outrageous unexpected events will likely not be able to do its job over the long term, even if it gets an outlier right here or there. A well-constructed portfolio, on the other hand, is durable and ready for anything.

More and more investors are buying “factor” based strategies which invest using measures like valuation and low volatility, but the most popular strategies are applying factors in the wrong way. Strategies should be built for alpha, not scale—but the asset management industry has gone in the opposite direction.
Most factor-based strategies—commonly called Smart Beta—have hundreds of holdings and high overlap with their market benchmark. The far more powerful way to apply factors is to use them first to avoid large chunks of the market and then build more differentiated portfolios of stocks with only the best overall factor profiles. While not as scale-able as smart beta, this alpha-oriented approach has led to much better results for investors.

Indexes are affected and changed by asset flows into strategies which target those indexes. This is true when hundreds of billions of dollars seek low price-to-book strategies, and for the entire market as a whole. Fund flows affect everything, especially when those flows have T after them. To this point, this has worked in one direction, for the most part. Portfolios with decent valuations, by historical standards, are only achievable today through portfolios that are very different from the S&P 500. Costs are very important. But there are management fees and there are valuation multiples. At the very least, I urge you to consider both.

Vincent Denoiseux, a director in Deutsche Asset & Wealth Management systematic funds business, analyses the smart beta trend of investors looking to create portfolios of risk factors.

As the exchange traded fund universe expands into enhanced, “smart-beta” indexing strategies, financial advisors are spoiled for choice. Still, it is important to pause and take a moment to understand what you’re getting yourself into.

“Having so many choices is a good problem to have, but it is important to understand the differences among them to construct an investment portfolio that suits its intended purpose,” Dan Waldron, senior vice president and ETF strategist at First Trust Portfolios LP, said on InvestmentNews. “It may be helpful to put all ETFs into two broad categories: beta and alpha.”

Des gestions lancées sur le segment du « smart beta » connaissent une croissance spectaculaire.Les investisseurs sont...

The greatest risk of a currency war breaking out involves emerging market countries whose exports compete with those from Japan, according to the view of ING Investment Management.

It has said that the likelihood of a currency war between members of the G7 is very low following the meeting of that organisation in the past week, despite the ongoing efforts of both Switzerland and Japan (one of the G7) among developed markets to push down the value of their respective currencies.

The commodity currencies - Australian, New Zealand and Canadian dollars - are seen as over-valued currently by ING IM, but these countries still do not seem willing to push competitive depreciation.