Why It’s Time for Better Beta

Index investing is evolving to meet the needs of asset owners 

Asset owners face some tough choices right now. A low growth environment mixed with the threat of rising interest rates and inflation mean that every decision matters when it comes to generating much-needed risk-adjusted returns. It’s not just about alpha – asset owners are also taking a closer look at their beta exposure, including their index investments.

Indices have for years been seen as a fairly reliable source of beta that doesn’t need much effort or tinkering. But increasingly, investors are coming to realize that not all indices are created equal. As trillions of dollars pile into them, for example, the underlying securities can become decoupled for their intrinsic value. At the same time, asset owners are now seeking to achieve specific investment outcomes related to factors such as themes or – increasingly – environmental, social and governance (ESG) goals.

As that happens, investors are asking important questions about the exposures in the indexes they hold and how they align with their overall goals. Are the underlying holdings of a particular index consistent with their specific regional or sector targets? And, in the case of ESG, do they align with their beliefs and values?

To address those needs and questions, asset owners are turning to a growing universe of customized indices. While these indices represent a significant step forward in the beta space, investors need to understand the elements that go into building these customized solutions. To ensure they are getting what they need from a tailored index, Invesco has identified three key differentiators that can help asset owners navigate the index investing space. Specifically, investors should look out for:

Analytics – Custom index strategies must start with an understanding of an asset owner’s specific goals and their current holdings, including specific index exposures by region, sector, factor or ESG rating.

Expertise – Better indexing starts with a clear picture of the index universe as well as the challenges faced by asset owners. That expertise must be applied at every level of the index customization process, from traders to portfolio managers to researchers. 

Platform and resources – Creating the right custom index requires the ability to tap into a wide platform of exposures and the resources and then combine them into a unique vehicle that fits with a specific plan structure.

Asset owners today require consistent and specific exposure to the areas of the market they want to access – and they need meaningful data on their holdings along the way. Custom indexes are definitely challenging the status quo – and that’s good for everyone.

Invesco understands that a one-size-fits-all indexing approach isn’t effective in today’s investing environment. Find out more about their approach to index portfolio management and how it can help asset owners meet their goals.