Portfolio Construction

In their survey commentary, EDHEC's researchers point out the importance of style factors in portfolio construction. In particular, choosing different investment styles helps to build a more diversified portfolio, they argue, since these styles tend to be relatively uncorrelated by investment returns over time.

However, EDHEC's survey respondents seem to be relatively conservative in their choice of equity ETFs. Seventy-two percent of investors use broad-market, capitalisation-weighted equity ETFs in their core portfolio, whereas style and sector ETFs tend to be used as satellite investments.

We asked ETF issuers whether they expected to see broader use of style and sector ETFs as core holdings.

According to Hamid of iShares, "style and sector tilts tend to be tactical rather than long-term, and we would expect this to remain the case. European investors may focus on style shifts - from value to growth, for example - but this tends to be a less well-defined trend than in the US market. Sector ETFs in Europe should enjoy greater usage as investors should differentiate their sector exposure, depending on expectations of any economic recovery."

Mistry of db x-trackers pointed out that the wide range of ETFs on offer now allows investors to construct portfolios with different building blocks, as they see fit.

Rhind of ETF Securities added that the variety of available noncap-weighted indices—whether earnings- or dividend-weighted, or based on methodologies such as Research Affiliates' fundamental indexation, tend to come under the "value" style category. Therefore, if markets were perceived to be in an environment benefiting value stocks, such ETFs could come to be seen as core holdings.

Part Of The Mainstream

EDHEC's European ETF Survey 2009 shows that ETFs are now very much a mainstream product amongst institutional investors this side of the Atlantic. Exchange-traded funds continue to gain ground at the expense of other tracker products, and investors' planned use of them looks to rise still further.

The survey responses also suggest that ETF market product development will be focussed on filling in some remaining gaps in asset coverage, encouraging investors to make greater use of short-selling and ETF lending, and on continuing to expand the options of investors who would like a variety of index construction methods.

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