Track record tops global investors’ ETF selection criteria

Expense ratios are not the deal-clinching feature for funds that they were just a year ago

Track record tops global investors’ ETF selection criteria

Whether it’s due to fatigue from the fee wars or a rude awakening from last year’s market downturns, investors are starting to rank historical fund performance on par with expense ratio when selecting an ETF.

That was among the key findings of the 6th annual ETF investor survey conducted by Brown Brothers Harriman & Co. (BBH) in partnership with The poll, which was previously done by region, has consolidated the reported expectations and preferences of 300 institutional investors, financial advisors, and fund managers from the US, Europe, and China.

“We are seeing global ETF investors giving historic returns equal consideration to cost when selecting an ETF,” said Shawn McNinch, global head of ETF Services at BBH. “[O]ur survey finds that professional investors are looking beyond the lowest-cost products and seeing tactical vehicles like smart beta and active ETFs as ways to bolster returns or mitigate risk, especially in periods of heightened volatility.”

In the wake of global market volatility, there has been increased interest in ETFs that have exposure to fixed income, non-correlated sectors like commodities, and smart-beta/active products. ETF issuer has also become a more important consideration, making it to the top three criteria cited by respondents in each of the three regions.

And while ESG factors were the least important ETF selection yardstick among global investors, ESG was among the top three responses for strategies that they want to see more of. That suggests that rather than non-ESG ETFs with some ESG exposure, those who take an interest in responsible investing want to buy a pure-play ESG strategy.

Reflecting trends from fund flows, nearly 30% of respondents said they had purchased a smart-beta ETF to replace an active mutual fund. The appetite for smart beta has risen due to a desire for risk mitigation or volatility control, which was cited by 70% of smart-beta ETF users.

Global ETF holdings are also expected to increase as 61% of respondents declared plans to raise their ETF allocations in the next 12 months; another 26%, meanwhile, plan to maintain their current ETF investment levels. Eighty per cent of respondents in Greater China have increased their ETF holdings to more than 10% of their AUM, compared to 73% and 79% of their European and US counterparts, respectively.

The poll also found that while historical performance is a key selection factor, 40% of participants were comfortable buying a new ETF with under US$25 million in AUM. The proportion of respondents that held that attitude in Greater China (47%) was significantly higher than that in the US (36%) and Europe (35%), which could be because it is the most nascent among the three markets.


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