ETFs to boost performance via risk factor exposure: analysts

Investors of exchange-traded funds (ETFs), which have gained popularity in Taiwan’s equity market, have been advised to take advantage of risk factor exposure to boost the performance of their investments, according to analysts.

Statistics released by the Taiwan Stock Exchange, which operates the local main board, show that 310,000 retail investors and more than 3,500 institutional investors have participated in local ETF trading, up 28 percent and 52 percent, respectively, from the 2003 figures, indicating that enthusiasm for ETFs in Taiwan has grown significantly.

Risk factor exposure used in the financial market is part of the “smart beta” investment strategies and could serve as a good way of raising investment returns in ETFs, even if the investment is passive, just tracking indexes, analysts added.

Risk factors are a concept in finance theory, and refer to a range of factors, such as capital asset pricing models (CAPM), arbitrage pricing theory and other theories. Analyzing these risk factors can enhance investment performances.

Smart beta investment portfolios offer the benefits of passive strategies, combined with some of the advantages of active strategies.

Vincent Kwan, director and general manager of Hang Seng Indexes Co., which compiles and manages the benchmark Hang Seng Index in the Hong Kong market, said it is important for an index company to design rules governing smart beta strategies that are easy for investors to understand.

Kwan said that if the rules governing the smart beta investment strategies are hard to learn, investors will simply leave them alone.

Kwan said that he has faith that investors will be able to see the advantages offered by the smart beta investment strategies when investors who want to park their money in the current Shanghai-Hong Kong Stock Connect program and in the future Shenzhen-Hong Kong Stock Connect link, which is expected to kick off in November.

The Shanghai-Hong Kong Stock Connect trading platform allows foreign investors to trade Chinese A-shares in Hong Kong, and investors in Shanghai to trade Hong Kong shares in China. The future Shenzhen-Hong Kong Stock Connect link will provide a similar trading concept for investors in those two markets.

According to S&P Dow Jones Indices Co., the index company has found that risk factor exposure works very well in the S&P 500 Index and other indexes the firm compiles and manages in the Asia-Pacific market.

S&P Dow Jones Indices said, however, that since every risk factor has its own characteristics, investors need more education in order to know which risk factor is suitable in which market.

For its part, the FTSE Group said that the modern financial market has seen a trend of multiple risk factors instead of just a singular risk factor, so the smart beta investment strategies should accommodate this trend and allow investors to make more profits.

Source: Focus Taiwan News Channel