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Monsters, Mud and Misunderstanding

FTSE Russell

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At the Inside ETFs industry confab in late January, David Nadig of #ETFTrends led a lightning round of 10 questions in 20 minutes for FTSE Russell executives Jayni Kosoff, head of fixed income strategy & business development and Rolf Agather, director of North America research. With the goal of generating an “intense amount of information in a short period of time,” Nadig’s questions were designed to make #InsideETFs industry conference goers think about how market indexes, data and analytics—spanning equity and fixed income—fit into the ETF industry.

“What has surprised you about the last decade?”

Rolf – “The biggest surprise of the last 10-15 years has been crossing the Rubicon in index design from what was primarily broad, cap weighted indexes for market exposure into more using indexes to plumb more depths like factors, fundamental weighting and smart beta. ETF industry pioneers like Invesco and Research Affiliates helped us all make that evolution.”

“Are multi-factor indexes just mud? Prove me wrong.”

Rolf – “This can be true if you don’t do it right. Academic research has identified systematic drivers of return and they are distinct… and that’s the whole point. They are driven by different risks or for behavioral reasons. At FTSE Russell, we are focusing on being intentional about factor exposure. Investors decide on what exposure they want, and we have tools to enable them to get those exposures, while recognizing exposures you don’t want. That might be the mud, right?

For example, you may want a value index, but it’s correlating with quality, which you don’t want. So, it’s about being intentional about choosing the exposures you want and having the tools to avoid the exposures you don’t want.”

“Are bond indexes just bad?”

Jayni – “Bond indexes aren’t all bad, some may just be misunderstood.  Low and negative interest rates are likely to persist, but investors will still need to allocate to bonds. More thoughtful indexes providing approaches around the liquidity conundrum in the corporate bond market, for example, can help investors. When an index is constructed to be more liquid and investable, investors avoid paying for the illiquidity premium and can get better performance.”

“Are there any factors in the bond market beyond credit and duration?”

Jayni – “In fixed income, investors can’t ignore credit and duration, but there’s more to consider. There are ways to express and layer in different views by looking at fundamentals of issuer, macroeconomics, and fixed income ‘style’ factors that—like equity factors—take a view on the market. Also, within a fixed income market segment like mortgages, for example, you can’t ignore prepayment or volatility, while you’re also expressing a view about the direction of the market.”

“What are the monsters under passive’s bed? Is there anything we should be legitimately worried about?”

Rolf – “I think this is such an apt analogy because once we grow up we realize that monsters under the bed aren’t real. There are some legitimate concerns with the dramatic growth of index investing and what that means for price discovery and corporate governance, but ultimately passive investing is very transparent and in the open so we can anticipate where issues may arise.”

Jayni – “More education can shed light on the topic and make those monsters go away. The fast pace of research coming out on systematic fixed income will drive innovation for investors. Big data and technology will undoubtedly add fuel. The traditional role of index providers like us is to ‘turn the lights’ by providing transparency on indexed investment strategies.”

For more information on FTSE Russell and our global multi-asset indexes, visit the FTSE Russell website.

Originally Posted on February 13, 2020 – Monsters, Mud and Misunderstanding

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