Research from Ignites Distribution Research reveals that the amount of assets invested in smart-beta ETFs could grow by 25 per cent over the next three years.
The firm writes that smart beta has become one of the hottest concepts in asset management, and especially in ETFs. As of mid-2016, the US market featured over USD460 billion in assets invested in more than 600 smart-beta ETFs, according to Morningstar.
Of the 740 financial advisors surveyed by Ignites Distribution Research across broker-dealer and registered investment advisor (RIA) channels, 35 per cent are currently using smart beta ETFs. “That’s significant, but it’s a notably lower percentage than those using traditional ETFs — which suggests plenty of room to grow,” the firm claims.
“Our growth expectation is based on the fact that once advisors start using smart beta ETFs they’re very likely to boost allocations to them. Among the smart beta ETF users we surveyed, 78 per cent of them plan to increase their overall AUM in smart beta strategies over the next three years.
“Of the 78 per cent planning an increase, 14 per cent of advisors are considering increasing their overall AUM in smart-beta ETFs by 11 per cent or more. Extrapolating those dollars to the broader advisor universe suggests more than USD100 billion in net new flows to smart beta ETFs over the next three years even if no new advisors start using them.
“However, more advisors are expected to start using smart beta ETFs. Of the advisors we surveyed who don’t use smart beta ETFs, 17.5 per cent are considering using them. Meanwhile, 52 per cent of advisors don’t have plans to use smart beta ETFs but are open to learning more.”
Loren Fox, director of Ignites Distribution Research and co-author of the report says: “The payoff can be big for purveyors of active management because smart beta ETFs can command significantly higher fees than traditional ETFs. Already a number of fund firms that typically eschew passive products have drawn on their active expertise to enter the smart beta ETF market.
“As additional firms add to an increasing number of smart-beta ETFs, it becomes more important to understand how advisors are deploying these products and where there are genuine openings in the market.”
The firm reports that one of the key findings of the report is that financial advisors using smart beta ETFs view the concept — taking a rules-based approach to gain exposure to a single factor, multiple factors, or even a strategy — as somewhere between active and passive management.
The report reveals how often advisors use smart beta ETFs to complement active or passive allocations in portfolios, or to replace active or passive allocations. Ignites Distribution Research found that asset managers aren’t always attuned to advisors’ use of smart beta ETFs within portfolios, overemphasising certain aspects of the products.