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Beverly Chandler, GFM

Smart beta causes ETF revolution in the asset management industry


Latest figures from exchange traded fund (ETF) data provider ETFGI reveal that ETFs globally gathered net inflows of USD68.95 billion in June, bringing year-to-date net inflows to USD209.54 billion, and creating a new record of USD5.64 trillion in assets.

ETFs continue on their victory parade across the world’s investments, as investors are increasingly attracted by their transparency, liquidity and their low fees.

The smart beta strategy, within the ETF eco-system, also continues to enjoy success, with Amundi detailing within this smart beta report what it calls the The Smart Beta ETF (r)evolution.

The firm writes that smart beta has created a revolution in the asset management industry over the past 10 years. By implementing factors in the underlying ETF portfolio, smart beta allows investors to implement investments with certain characteristics, such as value and momentum, designed to outperform the market.

As Amundi says, for many years, investors had no choice but to choose an active manager who selected those stocks with a particular characteristic. 

Smart beta ETFs allow the investor to choose an ETF which will systematically select stocks with characteristics like low volatility and growth, or even combine factors, at lower cost, the firm says.

Data and index provider Morningstar has also examined the growth of strategic or smart beta ETFs. The firm found that at the end of 2018, there were 1,493 strategic-beta exchange-traded products, with collective assets under management of approximately USD797 billion worldwide.

Morningstar describes smart beta ETFs as a blend of active and passive funds, offering a happy mix of the outperformance of the former and the lower fees of the latter.

It is within smart beta ETFs that the investor can find sophisticated opportunities to access alpha and ideally outperformance of a market, and all through the ETF wrapper.

Growth in the sector has been driven by new cash inflows, new launches and the entrance of new players who often come from firms that offer active investment management, Morningstar says.

The amount of market share represented by smart beta has slowed though, with a decrease in new smart beta product launches and increasing pressure on fees. 

That Morningstar study found that in 2018, the number of new product launches declined from the record level set in 2017. There were 132 new strategic-beta ETPs brought to market in 2018, down from 257 in 2017. 

Morningstar feels that the decline speaks to the fact that the menu has been saturated. “This process of growth and maturation ultimately will lead to a culling of the herd, which has already begun in some countries, albeit to a limited extent.

“An increasingly crowded and competitive landscape will also continue to put pressure on fees. We have already seen instances of aggressive fee reductions for strategic-beta ETPs. We anticipate that cost competition in this space will become more prominent in the coming years,” the firm writes.

Meanwhile, another study found that smart beta poses something of a conundrum for financial advisers within the US. The study reported that most US financial advisers are familiar with the concept of smart beta, or strategic beta as the report calls it, but few feel confident in implementing it in client portfolios.

Columbia Threadneedle Investments’ US survey reported that 98 per cent of advisers were familiar with the concept of smart beta, but just 36 per cent were confident in using it.

Interviewed for ETF Express, Marc Zeitoun, Head of Strategic Beta and Private Client Advisory at Columbia Threadneedle, reports that he was surprised by this survey’s findings. Another finding was that less than half of the people could name their portfolio manager on their strategic beta ETFs. The survey reported that only 18 per cent of advisers could name most or all of the portfolio managers of ETFs they use, while 27 per cent of advisers can do the same for the actively managed funds they use in client portfolios.

Commenting on the difference between ETF users in the US and Europe, Zeitoun said: “I know from our European colleagues that smart beta is readily adopted at the institutional level and when you think about what is the institutional process – it’s all about due diligence. We need to push that along the spectrum into wealth management,” he says. “Advisers think price and tracking error are the only two salient points.”

Other findings from the survey were that while few advisers (15 per cent) were talking to clients about strategic beta today, more than half (52 per cent) of advisers familiar with strategic beta planned to use it when constructing client portfolios in the coming year.

Advisors rank enhancing portfolio diversification, incorporating factor-based investments and leveraging active manager insights in a passive product as their top three reasons for planning to use strategic beta in their clients’ portfolios; just 4 per cent said lower fees were the driver for implementation.

Portfolio diversification is also part of what smart beta offers the ETF investor, whether institutional or retail.

Looking at the latest set of ETFGI data on the sales of ETFs globally, seven of the top ETPs by net new assets in 2019 were invested in gold or precious metals. 

Thematic investing, particularly in a commodity that is enjoying its biggest rally in a number of years, is another way that investors and their advisers can tailor make their portfolios using ETFs.

A new study from Invesco, published in June, revealed that 72 per cent of professional investors believed the gold price would rise in 2019, and the firm reported that the amount of assets invested in Invesco Physical Gold ETC had reached a record high on the product’s 10-year anniversary.

The attraction of physically backed gold ETCs is evidenced by market flows, Invesco says, quoting data that revealed that Gold ETCs listed in Europe had gathered USD3.5 billion of assets at the end of June, taking total assets invested in these products to almost USD50 billion. 

Using smart beta to bring in market timing and market themes is another extension of the uses of the strategy. Top themes this year are clearly dominated by gold, but ESG is also undeniably a key theme for investors, and equally well represented in the ETF lexicon, along with Robo, Artificial Intelligence and Marijuana.

However it is utilised, smart beta clearly remains a driving force in the ETF ecosystem. n

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