Last updated: 15:21 / Thursday, 25 August 2016
Ignites Distribution Research

Report Projects 25% Growth in Smart-Beta ETFs

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Report Projects 25% Growth in Smart-Beta ETFs
  • 78% of financial advisors using smart-beta ETFs to allocate more assets to the hot products
  • “Smart beta” (also known as strategic beta, factor-based indexing and other names) has become one of the hottest concepts in asset management, and especially in ETFs
  • "Extrapolating the data to the broader advisor universe suggests more than $100 billion in net new flows to smart-beta ETFs over the next three years even if no new advisors start using them"
  • Financial advisors using smart-beta ETFs view the concept as somewhere between active and passive management

The amount of assets invested in smart-beta ETFs, which are not based on traditional, market capitalization-weighted indexes, could grow by 25% over the next three years, according to new research from Ignites Distribution Research, a Financial Times service.

“Smart beta” (also known as strategic beta, factor-based indexing and other names) has become one of the hottest concepts in asset management, and especially in ETFs. As of mid-2016, the U.S. market featured over $460 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% 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", says the report.

"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% of them plan to increase their overall AUM in smart-beta strategies over the next three years. Of the 78% planning an increase, 14% of advisors are considering increasing their overall AUM in smart-beta ETFs by 11% or more. Extrapolating those dollars to the broader advisor universe suggests more than $100 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 Ignites surveyed who don’t use smart-beta ETFs, 17.5% are considering using them. Meanwhile, 52% of advisors don’t have plans to use smart-beta ETFs but are open to learning more.

Those findings are contained in Ignites Distribution Research’s new report, The Opportunity in Smart-Beta ETFs, which examines not just the potential for smart-beta ETFs but how advisors are using them and how asset managers can best address this burgeoning market.

“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,” says Loren Fox, the director of Ignites Distribution Research and a co-author of the report. “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.”

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, overemphasizing certain aspects of the products.

Ignites Distribution Research surveyed the Financial Times 400 Top Broker-Dealer Advisors, a list of top broker-dealer advisors from across the U.S. managing, on average, $1.7 billion in client assets; the Financial Times 300 Top Registered Investment Advisors, a list of elite, independent RIA firms managing, on average, $2.8 billion in client assets; and midsize financial advisors in the broker-dealer and RIA channels that manage, on average, $300 million in client assets.

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