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Cerulli Associates sees improved conditions for smart beta ETFs in Europe


Amid a challenging market environment featuring underlying macroeconomic instability, smart beta or factor-based investing has seen an uptick in investor interest, according to Cerulli Associates.

The firm writes that the economic backdrop of low or negative growth, combined with stagnant wages and higher inflation, has created improved conditions for smart beta approaches based on fundamentals such as value or dividends. 

Assets under management (AUM) of fundamental-tilted funds have been more stable than those of traditional strategies, the firm says. By November 2022, European smart beta ETFs had EUR93.7 billion (USD103.5 billion) in AUM, compared to EUR102.1 billion in December 2021.

Value has been a standout factor this year in terms of both performance and flows, relative to market cap funds. Total net European monthly inflows into value funds reached EUR15.1 billion for October 2022, not far off the EUR15.8 billion for December 2021.

“Value strategies’ outperformed traditional market-cap-weighted ones in 2022, largely due to their energy overweight,” says Fabrizio Zumbo, director, European asset and wealth management research at Cerulli Associates. “Quality strategies did worse than value strategies in 2022, but as they tend to do better during recessions, they could potentially outperform in 2023.”  

The European smart beta fund market is still small compared to its US equivalent. However, over the next 12 to 24 months, smart beta ETF issuers expect assets to increase in European markets, especially in the UK. Some 20 per cent of issuers think there will be fast growth (more than 10 per cent) in the UK market over the next 12 to 24 months, the firm says, 23 per cent think there will be moderate growth (between 6 per cent and 10 per cent), and 43 per cent predict slow growth (between 1 per cent and 5 per cent).  

Managers expect Switzerland to experience the second-highest level of growth, with 17 per cent of issuers expecting fast growth, 31 per cent moderate growth, and 23 per cent slow growth. The market that is expected to grow the least is Italy, where 40 per cent of issuers said there will be no growth over the next 12 to 24 months, Cerulli says.  

“Smart beta growth across Europe will depend on how these factor-based strategies perform during the challenges that 2023 brings and whether this performance is enough to attract investor flows,” notes Zumbo. 

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