Passive investments can be the building blocks for many portfolios, but index tracking now goes way beyond single markets. As more investors have integrated passive into their portfolios, many funds now target investor objectives.
This was previously possibly only through active managers, but objective based ETFs can replicate these strategies with absolute consistency, and at a much lower cost.
Enter Smart Beta
Smart Beta is a term that is floated around a lot, but what does it really mean? At Lyxor we see smart beta as a midpoint between active and passive investing. It's a way for investors to capture the key performance drivers used by stockpickers - like selecting high yielding or value stocks - whilst keeping the key benefits of ETFs - like transparency and low costs. Whether you are looking for risk control, targeting income or needing to enhance returns, a Smart Beta fund can help you to stay on track towards your long-term portfolio goals.
We all know that markets can get rocky sometimes but that doesn't mean you should lose out on those returns. - not every investor can bear full market risk, but there is an opportunity cost of remaining in cash or fixed income markets. With the current political and economic climate more investors are being forced into equity markets and granted they tend to be unpredictable!
As long as you invest in equities, risk cannot be completely eliminated. But minimum variance indices can reduce risk by up to 30% compared with a standard market index - which can smooth the road. At Lyxor, we chose to use FTSE's minimum variance indices - these not only reduce risk, but also retain a high level of diversification. This can be important as in the quest to reduce volatility, you don't want to end up with all your eggs in one basket.
Rates are low and bond yields are uninspiring, so many investors are looking to equity income. Income-focused passives use a smart beta approach to target higher yielding assets. The hunt for returns can lead to the "yield trap" - buying struggling companies with high but unsustainable yield. However big data and better data means more refined strategies have been launched in recent years.
Income focused ETFs offer a direct way to target dividends, and their yield can be higher when income is a priority. They offer an alternative to an active equity income fund, but without the risk of managers taking a bad call or leaving. And with TERs as low as 0.19%, this is still a very low cost way to access dividends.
So we know that markets are unpredictable and that's not likely to change anytime soon. Equities tend to be more risky than bonds, but with the risk can come greater rewards. Historically asset classes, for example bonds and equities, would move inversely to each other but that doesn't seem to be the case anymore. When markets are more correlated, you have to go further to find true performance.
Factor investing is a term used for selecting stocks according to a specific behaviour such as those rising fastest or offering highest value. This is an approach used widely in the pension fund world, and through ETFs it's now easier to isolate stock characteristics which have been shown to improve returns in the long run. And this can be integrated as part of the portfolio core or satellite to tilt exposures in the long run. Factor investing does come with a word of caution; its a fast moving world and you need to stay on top of your strategy if you want to be in the right factor, at the right time. Some prefer a multifactor approach that spreads risk across factors.
Quick take: Lyxor offers a range of objective based ETFs, using smart beta and factors to achieve goals which were previously only available through active strategies. These can be offered at total expense ratios from 0.19%. For more information, visit LyxorETF.co.uk
Charge data - Lyxor ETF, correct as at 20/11/17. Risk reduction Lyxor International Asset Management, Bloomberg. Data from 30/12/2015 to 31/08/2016. Past performance is not a reliable indicator of future performance.
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This communication is exclusively directed and available to Institutional Investors as defined by the 2004/39/EC Directive on markets in financial instruments acting for their own account and categorised as eligible counterparties or professional clients. This communication is not directed at retail clients. This document is issued in the UK by Lyxor Asset Management UK LLP, which is authorized and regulated by the Financial Conduct Authority in the UK under Registration Number 435658.
Some of the funds described in this brochure are sub-funds of either Multi Units Luxembourg or Lyxor Index Fund, being both investment companies with Variable Capital (SICAV) incorporated under Luxembourg Law, listed on the official list of Undertakings for Collective Investment, and have been approved and authorised by the CSSF under Part I of the Luxembourg Law of 17th December 2010 (the "2010 Law") on Undertakings for Collective Investment in accordance with provisions of the Directive 2009/65/EC (the "2009 Directive") and subject to the supervision of the Commission de Surveillance du Secteur Financier (CSSF). Alternatively, some of the funds described in this document are either (i) French FCPs (fonds commun de placement) or (ii) sub-funds of Multi Units France a French SICAV, both the French FCPs and sub-funds of Multi Units France are incorporated under the French Law and approved by the French Autorité des marchés financiers. Each fund complies with the UCITS Directive (2009/65/CE), and has been approved by the French Autorité des marchés financiers.
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