Smart beta transparency remains key concern

Smart beta transparency remains key concern

A considerable number of investors have concerns regarding smart beta exchange-traded funds (ETFs), despite most investors in the products being pleased with their purchase, according to the EDHEC-Risk Institute.

Lack of transparency in particular remains a key concern.

"While transparency is important for market indices (i.e. indices that aim to represent a given market or segment), it is all the more so for smart beta indices. Indeed, while these new forms of indices can provide investors with improved risk-reward profiles or other benefits, they bring distinct risks of their own," stated the report. 

"Unfortunately, these indices’ low level of transparency, which is routinely justified by the use of proprietary models, makes the evaluation of risks difficult."

Most of the survey respondents (88%) agreed that smart beta indices require full transparency on methodology and risk analytics.

Transparency is not only the best protection against the risks arising from conflicts of interests, says the report, but it is also instrumental to improving the informational efficiency of the indexing industry. 

This result is supports the position of EDHEC-Risk Institute, which is continually advocating for improvements in index transparency.

Despite ongoing concerns, investors in smart beta exchange-traded funds (ETFs) are happy overall with around three-quarters (74%) of smart beta ETF users saying they are satisfied.

Smart beta ETFs dominate the list of top items mentioned by investors when asked about their list of top priorities for future product development in the ETF space. 

Of the six top priorities, four concern indices relating to smart beta approaches, namely smart beta equity (37%), equity factor (31%), equity style (29%), and smart beta bond (25%).