Smart-beta products may be more 'dangerous' than ETF providers claim

Risks of factor investing

ETF providers are failing to highlight the specific risks of factor investing, according to a new white paper by Research Affiliates.

The report published by the global research house, entitled Ignored Risks of Factor Investing, criticised one of the fastest-growing areas of the ETF market as providers and academics were "severely" understating the risks of investing in the space. The factor investing industry reached $1.9trn assets under management (AUM) at the end of 2017 (see chart, below), up from $643bn in 2011, with BlackRock predicting it could hit $3.4trn in 2022. However, the Research Affiliates report warned factor ETFs can be "serially" correlated to one another, meaning multiple factors can be exposed to...