Demand from ETF providers for MSCI factor indices has surged, with almost half of new MSCI index-based ETFs launched in 2014 linked to MSCI factor indices, according to a report by the index provider.
Overall, 95 ETFs based on MSCI indices were launched in 2014, almost twice as many as the next index provider, with 42 (45%) of these linked to factor indexes, compared with six in 2013, according to MSCI. The report also shows that 12 new ETFs tracking MSCI Multi-Factor Indices, which combine more than one factor, were launched in 2014.
“The use of factor is not new, but the ability to capture these factors in an index format is what’s new. Factors have been captured by active asset managers for years and MSCI’s Barra franchise has been researching investment factors for over 30 years,” said Deborah Yang (pictured) head of index business Europe Middle East Africa and India (EMEAI) at MSCI. “Having factors in an index opens new opportunities for investors as they can use these indices in passive and index-linked products. The availability of factors indexes and the creation of index products helped to play a role in the surge in demand. ”
According to Yang, certain factors have historically earned a long-term risk premium and represent exposure to systematic sources of risk and return. Factor investing is the investment process that aims to harvest these risk premiums through exposure to factors. “MSCI has more than $110bn of assets following MSCI factor indices, mainly from institutions, [and] pension funds, but there are also retail investors invested in our factor indices through index-linked products,” said Yang. “MSCI factor indices are designed to be used in any index-linked products including structured products.”
Factors behave differently during macro-economic cycles, and if there is a retail investor that has a view on the specific cycle (such as a value or momentum) these indices can be used to capture their views or need for diversification in a structured products format, she said. “Similarly, structured products can also play an important role in the portfolio of institutional investors seeking yield diversification,” said Yang.
MSCI calculates benchmarks on six equity risk premium factors, value, low size, low volatility, high yield, quality and momentum, “but there are different ways to capture each factor index and different ways in which they can be combined,” said Yang. “We conducted a survey last year among institutional investors and we found that a third of those polled have already invested in factor indices with another third considering factor indices for their investments,” she said. “With $110bn in AUM (assets under management) linked to factor indices, we are excited to see that a big portion of the mandates that are issued are related to factor indices.”
According to MSCI, with over 675 ETFs tracking MSCI indices globally, more ETFs track MSCI indices than those of any other index provider.
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