Exchange-traded funds based on alternative indices have been growing in popularity in recent years, and issuers have launched a range of so-called “smart beta” products to meet the increasing investor demand. But there’s still plenty of room for growth, according to the Edhec-Risk Institute. In its 2011 European ETF survey, released earlier this week, it reported that 39 per cent of survey respondents said that they would like to see more ETFs based on alternative indices, up from 29 per cent in last year’s survey.
Alternative indices have appeared in many guises, from accessing new asset classes through to factor or risk premia-based indices. However it is smart beta, a reassessment of how to weight existing assets to produce more efficient investments, that is capturing the attention of investors in Europe and worldwide.
To understand the rationale behind the various new approaches devised by ETF and index providers to respond to the growing demand from investors, it is useful to first consider the criticisms of traditional market capitalisation-based benchmarks. Market-weighted indices are an attempt to index a market portfolio and therefore, according to the Capital Asset Pricing Model (CAPM), should approximate to the “beta” of the market.