Nizam Hamid, (pictured) head of strategy at WisdomTree Europe, has commented on increasing flows to smart beta ETFs and what that means for the industry over the next four years.
He writes that the ETF industry has once again seen a huge uptick in assets under management recently, despite the negative impact of weak stock markets. According to statistics from the Investment Association, trackers in the UK accounted for 12.4 per cent of all retail assets by the end of 2015, a 16 per cent increase from 2014 with net retail sales also hitting a record high of GBP5.4 billion.
He writes that globally passive funds have grown four times faster than active products since 2007, according to the latest study by Morningstar, with assets in passives now standing at approximately USD6 trillion.
“There is a long way to go of course, especially in Europe where ETFs account for just 3.7 per cent of assets held in mutual funds. That figure is far below the US where they account for almost 17%, but this in itself presents an opportunity as there is clearly scope for European investors to add ETFs, either to gain core or satellite exposure to various asset classes.
“Smart beta is finding itself, more and more, front and centre when it comes to ETF usage. At the halfway mark in 2016, 40 per cent of total flows into European ETFs have gone into smart beta products, as investors become more sophisticated and look for more specific solutions rather than simply allocating to whole markets.
“An even more compelling statistic is that whilst European market capitalisation ETFs suffered outflows of USD9.1 billion in the first half of this year, smart beta and alternatively weighted strategies had net inflows of USD5.7 billion.
“This continues a trend seen last year, with Morningstar Direct data revealing smart beta equity ETFs listed globally gathered USD77 billion for the whole of 2015, taking total assets in the products to USD486 billion.
“Where does this take us over the next few years? If this current level of growth was maintained, it means the industry would push past USD500 billion by the end of 2016, and reach nearly USD800 billion by 2020.
“However, I expect the figure will actually be a lot nearer to USD1 trillion by the end of the decade, mainly because of two powerful trends: the desire for tailored ETFs and for low-cost alternatives to active funds – are now firmly in play.”
Hamid concludes that investors are cottoning on to the idea that, rather than weighting by market cap and simply having large positons in the biggest stocks regardless of their underlying performance, it makes sense to screen much more actively. “Creating a tailored index based on a specific set of rules can, over time, capture positive market trends, and if such solutions can outperform market cap indices (while costing less than active funds) it should help boost growth substantially, he writes. “This shift in thinking among ETF investors should not be underestimated, especially as investors continue to look more at outcomes and long-term goals.
“As ever, there also remains a case for using lower cost alternatives to active funds. That debate is not going anywhere, especially as fees on active funds are only ever going to fall at a snail’s pace, if at all.
“Smart beta solutions priced well below active equivalents will continue to benefit from this alongside the wider passive industry, especially given the cost-conscious environment we find ourselves in.
“Clearly, these solutions will not suit everyone, but if the strategies can do their part by continuing to deliver returns ahead of mainstream ETFs (and rival returns produced by active funds) the sky is the limit in terms of AUM growth.”
