In my final post of 2013, I highlighted several trends within the ETF industry that caught our attention last year. One major development that really stood out to me, more so than the others, was the considerable growth we saw in strategic beta – an investing strategy that we believe will continue to be a significant contributor to ETF flows in 2014 and for years to come.
Before discussing the flows, let’s first explore what we mean by “strategic beta”. While there is no single definition for strategic beta ETFs, it can most easily be defined as investments based on indexes that are not market-cap weighted. Unlike traditional market-cap weighted index funds, strategic beta equity funds hold a basket of stocks that are selected and weighted by characteristics other than company size. For example, one strategic beta fund may focus on high dividends while others may emphasize low volatility, momentum or quality. The objective of strategic beta is to improve performance by passively tracking an index that is not based on market-cap weighting. In other words, strategic beta is an enhanced form of passive investing.
Traditionally, tracking such targeted market exposure was only feasible through actively-managed funds pursuing alpha. Not anymore.
In 2013, we saw a record-breaking $65 billion flow into strategic beta equity ETFs, nearly a third of total ETF industry flows. That’s almost double the $34 billion we saw flow into this space in 2012.
Strategic beta equity funds gathered a record total of $65.1 billion – nearly a third of global industry flows in 2013 – with asset growth in excess of 50%.