The popularity of ETFs and index funds has grown over the last decade, and they now hold a significant share of the fund market. Investors are attracted to index funds particularly for their simplicity and low-cost structure.
However, traditional passive index funds have their challenges: they can’t beat the market, their indices are usually weighted according to the market capitalization of companies, and diversification suffers. Additionally, the composition of an index fund might not align with an investor's sustainability principles.
To address these challenges, Evli is launching two new Enhanced Index Funds: Evli Atlas Europe Enhanced Index and Evli Atlas USA Enhanced Index. These new enhanced funds combine the efficiency of traditional index investing with the added value of active portfolio management. The goal is to offer a cost-effective and diversified solution that, in addition to an index return, provides the potential of moderate outperformance with controlled active risk.
“The growth of index investing has permanently changed the investment markets. Enhanced index funds are the answer to how investors can get both the stability of an index and the potential for better returns than an index. Enhanced index funds are particularly suitable for cost-conscious investors seeking long-term investments for their strategic core portfolio. This is modern index investing,” says Peter Lindahl, Senior Portfolio Manager and Head of Systematic Funds at Evli.
An enhanced index fund still follows its benchmark index but aims for outperformance by selecting and overweighting stocks with strong fundamentals. Evli's Atlas Enhanced Index Funds follow the well-known MSCI USA and MSCI Europe indices but overweight the fundamentally strongest companies and underweight the weakest ones within them.
Integrating Sustainability
In an enhanced index fund, it’s easier to take sustainability factors into account because stocks can be over- or underweighted relative to the index. Furthermore, stocks included in the index can be excluded if they don't meet the fund's sustainability criteria.
Evli’s enhanced index funds adhere to Evli’s exclusion criteria, such as the exclusion of controversial weapons manufacturers. In addition, the funds emphasize companies' environmental impact. Within the EU's sustainable finance framework, the funds are classified as Article 8 financial products, meaning they promote sustainability factors.
“We overweight companies that are improving their environmental activities and underweight those that are moving in the wrong direction. This is particularly significant in the United States, where some companies have slowed their sustainability efforts for political reasons,” Lindahl explains.
A Cost-Effective Option for a Core Portfolio
The goal of the new funds is not to create a portfolio that deviates completely from the index but to improve it with limited active risk. The active risk of the Evli Atlas Enhanced Index Funds is moderate, targeting around a 2% tracking error level, whereas it can be 4–10% in traditional active funds.
The optimization model fairly considers different return drivers and neutralizes unnecessary risks, such as sector weightings. Evli's proprietary Atlas optimization tool plays a key role in the funds' optimization and efficient management.
“Enhanced index funds don't aim to generate huge relative returns; instead, they make the index a slightly more interesting and better option by emphasizing financial fundamentals and sustainability,” Lindahl summarizes.
Additional information:
Peter Lindahl, Head of Systematic Funds, Evli Fund Management Company Ltd
peter.lindahl@evli.com, tel. +358 40 5044 366
This article provides general product information and is marketing communication. Historical returns are no guarantee of future returns. The value of an investment may rise and fall and the investor may lose some or all of the capital invested. The contents of this article should not be considered as investment advice and should not be relied upon in making an investment decision. Before making an investment decision, you should consult the fund's legal documents, such as the fund rules, the key investor document and the fund prospectus. The statutory documents and additional information of the funds are available on the product-specific pages and on www.evli.com/funds.
