Smart beta exchange traded fund strategies that passively track customized indices have quickly attracted the attention of investors, and the relatively new ETF segment is just getting started.
Looking ahead, Sara Shores, Global Head of Smart Beta for BlackRock, anticipates four major developments in the smart beta ETF space in the year ahead: The revival of risk-seeking factors. Multi-factor strategies will be in the limelight. Smart beta finally filling out some fixed-income strategies. A greater importance of smart beta in a diversified investment portfolio.
Shores in a research note argued that a firming global economy and a pickup in corporate earnings are fueling pro-growth sentiment and reflationary themes, which have caused investors to become less defensive and more risk-seeking. Consequently, Shores sees increased demand for risk-seeking factors, such as value strategies that are now returning to favor after years of underperformance.
Multi-factor strategies are also growing more prominent as a well-rounded, diversified way for investors to mitigate cyclicality.
“A multi-factor strategy, which combines factors with low correlation to each other, has the potential to perform well under a variety of market conditions,” Shores said. “Indeed, I like to say that diversification is the first rule of investing, and it’s no different with factor investing. As investors look for higher returns, multi-factor strategies are bound to become a popular avenue for potentially consistent and cost effective incremental returns.”
Smart beta equity ETFs have quickly developed, but the smart beta fixed-income ETF space remains conspicuously vacant. Bond investors, though, are beginning to look for ways to diversify increased risks after a three decade-long bull rally in the fixed-income market, which may leave room for innovation in the smart beta fixed-income ETF category.