Strong demand for fixed income exchange-traded funds in the smart beta arena is being held back by limited product availability.

A new report from Invesco PowerShares, “Smart beta strategies: more bricks for portfolio building”, found that only one fifth of the 435 respondents, from the UK, Germany, Italy, Switzerland, the Netherlands and France, do not use smart beta yet. Smart beta ETFs do not track indexes just based on market capitalisation but instead track indexes based on other characteristics such as dividends or low volatility.

Mike Paul, head of Invesco PowerShares EMEA, said in a statement: “Smart beta is no panacea, but it does have the potential to help with major and emerging challenges such as low yields and finding value. Smart beta users are clearly recognising these benefits, not only increasing their allocations but becoming more sophisticated the longer they are invested.”

The report said most users use equity smart beta ETFs but more than half of institutional investors would consider allocating to fixed income strategies, particularly credit, corporate bonds and high-yield corporate bonds.

“The low showing of fixed income smart beta is likely to be a result of limited product availability,” added Invesco.

One German asset manager said in the report that they had read read about different bond strategies but not found investment products. Another Dutch pension fund executive added: “Smart beta in the fixed income universe is closely linked to the liquidity issue and we cannot afford to give away too much liquidity.”

The survey also found that  97% of users reported that smart beta allocations are meeting or exceeding expectations, and three quarters plan to increase their allocations.

Paul said: “If the market is the best benchmark for product excellence, then it is clear that smart beta is set to play an increasingly central role in the future of the European asset management sector.”

In September Franklin Templeton, the US manager, launched its first range of smart beta ETFs in Europe which were listed on Deutsche Börse and the London Stock Exchange.

Detlef Glow, head of EMEA research at date provider Thomson Reuter Lipper, said in a note last week that ETFs have been a success story in Europe over the past 15 years and the market does not yet seem to be oversaturated. Instead, new players have entered the market, despite high competition, although not all of them may be profitable.

‘There is a sweet spot (the “smart beta segment”) where the competition is not that high and the pressure on management fees is quite low,” added Glow. “Fund promoters can differentiate themselves there by using particular factors or by the way they structure the underlying indices for their ETFs.”

The Invesco survey aslso found that users  currently have 13% of their total assets invested in smart beta strategies, up from 8% last year, and expect to increase this to 23% over the next three years.

A record number of investors, 81%, would also recommend smart beta products to colleagues and other investment professionals, compared to 73% last year. Nearly all, 97%, of users said they are satisfied with smart beta products, up from 96% last year and 91% in 2015.