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Institutional investors look to increase exposure to smart beta

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New research from exchange traded fund (ETF) provider Source reveals that 27 per cent of institutional investors currently invest in one or more smart beta strategies, and of those that don’t, 31 per cent anticipate they will over the next two years.

Some 64 per cent of institutional investors believe assets in smart beta funds will grow between now and 2019 (only 4 per cent think it will decline, with the remainder undecided), and 34 per cent anticipate AUM in these strategies will increase by 30 per cent or more.  One of the key reasons for this growth is that 28 per cent of institutional investors believe investors will increasingly focus on smart beta strategies to enhance the dividends they receive.
 
Between now and 2019, 57 per cent of institutional investors anticipate that a growing number of ETFs using smart beta strategies will be launched, but care needs to be taken when it comes to selecting these. Many argue that the term smart beta is being misused, and 26 per cent of institutional investors expect tighter rules to be introduced around what constitutes this term.  
 
Earlier this month, Source and Research Affiliates LLC, a global leader in smart beta and asset allocation, launched three smart beta income ETFs that provide exposure to the new FTSE RAFI™ Equity Income Indices. These target high-dividend-paying stocks that have also been screened to favour sustainable income. The ETFs will offer investors a choice between US, UK, and European exposure.
 
Dr Chris Mellor, Executive Director, Equity Product Management at Source, says: “Smart beta is going to play a growing role in helping investors find quality stocks that pay an attractive dividend.  Together with Research Affiliates, we have developed our first set of ETFs in this area.”
 
These new ETFs use Research Affiliates’ fundamental measures to screen out companies in poor financial health, and then from the remaining stocks, they select the top 50 per cent in each sector based on their dividend yield.  It then weights the constituents by the product of their dividend yield and RAFI Fundamental weight, which is based on four fundamental measures of the company’s size rather than its market capitalisation.  The aim of this process is to build a portfolio of high-yielding, high quality stocks while avoiding excessive sector tilts and the biases that are inherent in market-cap-weighted indices. 
 
These are also the first funds to be launched on Source’s new physical ETF platform, which is being managed by Legal & General Investment Management, one of the largest index fund providers in the UK and also one of the largest smart beta managers and the largest global manager of FTSE RAFI index strategies. The Source FTSE RAFI Equity Income ETFs will invest physically in the underlying holdings of the indices. 
 

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