Adam Laird, head of ETF strategy, Northern Europe for Lyxor reports a sea change in investors’ use of smart beta ETFs in the last year. Lyxor currently manages around EUR3 billion in smart beta funds – just less than 5 per cent of its assets. Flows have been steady across 2018, with a sizable uptick in smart beta flows in Q3, along with rising market volatility – bringing Europe’s smart beta inflows over EUR4.6 billion.
“The most important thing is that this year has seen a real resurgence in interest for low volatility strategies,” Laird says. He believes that, because of the market environment, everyone is more concerned about risk to their portfolios going forward.
“We have had a decade now of very strong growth in the equity markets,” Lairds says. “Everything has been well protected but we have seen market dips in the US and a lot of investors are worried about the future – worried about protecting their assets.
“For a long time, everyone enjoyed the upside but there is a real recognition at the moment that good times can’t go on forever and that we need to be more cautious with our portfolios.”
Laird reports that caution is across the board with all types of ETF investors but that he has observed that it’s particularly true for wealth managers and private banks because individual investors are jumpy.
“The retail market has been forecasting the next crash for years, investors don’t like to lose. This presents a puzzle – do you stay invested and wait for the crash? Or move to cash and lose out on returns?” says Laird “There’s risks on both sides – nobody can time the markets”
The consequence is that Lyxor has seen an increase in demand for minimum volatility ETFs. The construction means that investors can retain 100 per cent of their investment in equities but at the same time the portfolios are constructed so that they are less volatile than a standard index.
Laird says: “We have seen a lot more investment in those ETFs, particularly as these strategies now have a track record with many having been around for over five years so they have proven themselves in the smaller market downturns in the last 12 months.”
Lyxor’s US Equity Low Volatility ETF has been particularly popular. It is designed to take into account the overall risk in the portfolio and buy complementary shares so that while each individual company might be volatile the portfolio has offsets within it to overcome that.
The example Laird gives it that the portfolio might offset oil price change by holding oil companies alongside car manufacturers. When the oil price is high and oil shares are going up this can offset the drop in the car manufacturers.
“The index does this mathematically – looking at correlation between share prices rather than individual company profiles.” Laird says. “The results show that this really works. In Q3, the Lyxor FTSE USA Minimum Variance ETF reduced risk by 16.9 per cent compared to the standard FTSE USA index.”