“Outsmart the index with our active ETF range” is the motto of Robeco’s ETFs
And on the subject of active ETFs, ETFWorld asked Nick King, Head of ETFs at Robeco, some questions
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Nick King, Head of ETFs at Robeco
18 December 2024 ETFWorld – All rights reserved
Nick King : We have seen significant growth of the ETF market in Europe and whilst this has historically been driven by passive products, we are increasingly seeing ETFs being used to access to active strategies. Active ETFs combine the benefits of active management with the convenience and flexibility of the ETF wrapper.
Offering ETFs alongside our existing capabilities in mutual funds and segregated mandates allows us to offer additional choice of access to our clients and meet their evolving needs. In addition, there are new distribution channels emerging that prefer ETFs or are exclusively using ETFs. We want to be make our capabilities accessible to these clients and react to a broader transition from mutual funds into ETFs.
Nick King : Robeco ETFs leverage Robeco’s research-led investment process and expertise in sustainable investing to offer active ETFs that don’t simply replicate the market but identify opportunities that the market has missed.
The 3D ETFs are designed to offer a compelling alternative to passive building blocks by balancing the three dimensions of risk, return and sustainability. The products utilize our quantitative research and models to identify attractive stocks whilst also managing risk relative to index. We further incorporate sustainability factors, recognizing that these can be a key driver of long-term value and resilience. The ETFs will always have an improved sustainability profile relative to the index and the dynamic approach allows us to adjust the extent of sustainability screening over time depending on whether it is aligned with the alpha target.
The Dynamic Theme Machine ETF is a multi-thematic product investing in a range of established and emerging themes. This ETF uniquely addresses the challenges of traditional thematic ETFs by identifying emerging themes before they become crowded, and dynamically adjusting the portfolio over time. The strategy employs advanced algorithmic techniques to process large amounts of data to identify new themes and relevant stocks. We then utilize our established quant models to identify optimal entry and exit points. An additional review by our experienced fundamental thematic investing team ensures that the ETF is exposed to the most attractive themes. This dynamic approach is designed to capture growth opportunities ahead of the market and staying agile as conditions change.
Nick King : Passive ETFs generally use market capitalization as the key metric to select and weight securities in the portfolio. Whilst this can be a simple and low-cost way to get exposure to a particular market, it also ignores a lot of information that is available on these securities. Our ETFs incorporate a range of different data points to select securities and build a portfolio which is designed to outperform, rather than simply match the market. By packaging our investment experience and research into an efficient, transparent, and accessible ETF wrapper, our Active ETFs offer the potential for performance along with the flexibility to adapt quickly to market conditions.
Nick King : The 3D ETFs utilize our proprietary stock selection model, based on five, evidence-based factors:
- Value identifies companies that appear undervalued compared to their peers. Our added distress risk signal helps us avoid value traps – companies that seem cheap but are actually high-risk.
- Quality looks for profitability, earnings quality, sustainability-themed indicators and long-term potential.
- Momentum measures how well a stock has performed recently, and our residual momentum factor helps us be less sensitive to the reversal this factor is prone to.
- Residualized analyst revisions combine long- and short-term revisions signals while mitigating for any biases, thus getting a comprehensive view of genuine changes in company prospects.
- Short-term signals help us adapt to market dynamics. Integrated machine learning and AI insights track these shifts and help us make well-informed, cost-effective trades.
The Dynamic Theme Machine ETF uses AI and quant techniques to identify emerging themes early, entering at the right moment and exiting as themes become crowded or overpriced. Passive thematic ETFs are typically concentrated in specific sectors, increasing volatility and long-term risk. The DTM ETF invests across a range of themes and sectors, adapting and rotating through themes based on real-time market data, making it a truly dynamic solution. It uses Natural Language Processing (NLP) to detect themes and to carry out sentiment analysis.
In simple terms, we’ve developed an NLP tool that can process massive amounts of public information – company earnings reports, management discussions, and C-suite tweets – to identify emerging themes. Once a theme is identified, we use another NLP tool for sentiment analysis to determine which companies will benefit or be harmed by the theme.
Nick King : When selecting stocks we consider five sustainability dimensions:
- Sustainable Development Goals (SDG)) framework
- Environmental (carbon, waste and water) footprints
- ESG risk ratings
- Active ownership (voting and engagement)
- Exclusion
This process doesn’t just improve the portfolio’s long-term potential by mitigating environmental and social risks; it also positions the ETF to capture opportunities in sectors and companies that are leading the way in the transition toward a more sustainable future. Sustainability exposure can vary based on market conditions. 3D investing doesn’t imply a fixed sustainability outcome, but continuously adapts to ensure the best possible trade-offs between the three dimensions, given the targets, subject to fixed requirements including a one-third reduction in carbon footprint.
Nick King : The 3D ETFs are based on our well-established enhanced indexing capability which has a 20-year track record of delivering excess returns with limited tracking error and we expect a similar outcome for the 3D ETFs.
The Dynamic Theme Machine ETF adopts a higher tracking error strategy where we would expect more significant deviations and alpha potential.
Nick King : Our ETFs actively manage risk by periodically rebalancing the portfolio to prevent overexposure to any one stock, sector, or factor, helping it remain diversified. This portfolio rebalancing is made with care, to control turnover. Each trade is optimized for liquidity and cost, because too much trading can lead to higher transaction costs, which would erode returns. This disciplined approach allows our ETFs to stay on track for their performance goals.
As we discussed earlier, incorporating sustainability factors into the investment process is another way we manage risk.
Source: ETFWorld.co.uk
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