Bright Future Seen for Smart Beta ETFs

Although so-called fundamental, intelligently indexed or smart beta exchange traded funds have been around for, in some cases, seven years or more, 2013 will go down as the year that these funds really captured their place in the ETF conversation.

Statistics prove as much. Last year, smart beta ETFs attracted $65.1 billion in new assets, nearly double the $34.2 billion hauled in by the group in 2012. [A Record Year of ETF Inflows]

It is not unreasonable to expect that number to rise. Cogent Research and Invesco’s (NYSE: IVZ) PowerShares unit, the fourth-largest U.S. ETF issuer and one of the leading purveyors of smart beta funds, partnered on a research paper entitled “The Evolution of Smart Beta ETFs.” Some of the findings bode well for the future of non-cap weighted ETFs.

For example, a quarter institutional decision makers indicate they are already using smart beta ETFs, implying significant room for growth. Speaking of growth, “over the next three years, institutions plan on increasing their use of smart beta ETFs more than any other category (including market-cap weighted ETFs),” according  to PowerShares and Cogent.

“Low volatility, high dividend, and fundamentally-weighted ETFs are poised to see the greatest growth over the next three years as two-thirds indicate they are likely to use these products,” the research points out.

That jibes with the ongoing popularity of low volatility ETFs such as the PowerShares S&P 500 Low Volatility Portfolio (NYSEArca: SPLV) and the iShares MSCI USA Minimum Volatility ETF (NYSEArca: USMV), along with the leadership of dividend ETFs as asset drivers to smart beta funds.