Exchange traded fund providers have focused in on alternative index weighting methods as existing products have been on a winning streak. Non-market cap-weighted ETFs have accounted for about $31.4 billion assets year-to-date, according to BlackRock data.
“ETFs are not just about passive exposures,” says Dodd Kittsley, head of global ETP market trends research at BlackRock. “Whether you define it as a strategy-based or smart index, I think the growth potential is enormous.” [WisdomTree ETF Assets Grow as Shares Rally 74%]
ETFs that focus on low-volatility stocks, equal-weight methods or other factors other than market capitalization have proven their potential based on the $31.4 billion in inflows year-to-date. ETF sponsors are aware that alternative weighting methods have been able to capture assets and see this as an area they can set themselves apart, reports Jackie Noblett for Ignites. [Low-Volatility ETFs Still Thriving as Market Wobbles]
Index diversification is like a new frontier in the ETF industry. Many of the cap-weighted indices are top heavy, and dominated by a few stocks, reports Scott Blythe for Advisor.CA.Within a market-cap index, there can be a huge correlation between mispricing and overweighting, Jacques Lussier, former chief investment strategist at Desjardins Financial, said.
Of the five top-selling ETFs for last month, three of them were non-market-cap weighted index trackers:
- WisdomTree Japan Hedged Equity ETF (NYSEArca: DXJ) $1.5 billion in inflows
- iShares MSCI USA Minimum Volatility (NYSEArca: USMV) $990 million in inflows
- PowerShares S&P 500 Low-Volatility (NYSEArca: SPLV) $924 million in inflows
“Transparent, strategy- or rules-based exchange-traded funds are successful because there is a need in the marketplace to reflect a particular view,” Kittsley says. “To me, this is the sweet spot around the thought of active ETFs,” he adds.
However, alternative-weighted indices are not going to continue to outperform traditional market-cap tools. Investors that are jumping into the fundamentally-weighted indices simply because of performance should consider how they work, rather than just what is working now. [Special Report: Alternative ETFs]
“There certainly has been a lot of discussion and interest in these alternative-weighted indexes, but I’m not so sure how much of the discussion is about market cap versus non-market cap than is around relative performance,” says Joel Dickson, principal in the investment strategy group at Vanguard.
Tisha Guerrero contributed to this article.