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.
“Dividend weighted- funds once again led Strategic Beta with $27.6bn of flows this year, more than double the $13.1bn collected in 2012. Many income-seeking investors have turned to dividend stocks as bond alternatives in a persistent low-interest rate environment,” according to BlackRock. [Smart Beta Outlook Shines]
Data for the Cogent/PowerShares study were collected from 193 participants between September 5 and October 2, 2013. A 15-minute online survey was administered by Cogent Research, a division of Market Strategies International, to institutional decision makers, including pensions, endowments/foundations, non-profit institutions, mutual funds, as well RIAs who manage institutional assets.
All institutions had at least $20 million in assets and allocated at least 1% of their assets to ETFs. Institutional RIAs had at least $25 million in assets under management – a portion of which was managed on behalf of institutional investors, according to the statement. [Institutions to Increase Use of Smart Beta ETFs]
It appears that going forward, increased awareness and education will be pivotal to the success of intelligent index ETFs. Those that have yet to embrace smart beta ETFs frequently cite a lack of familiarity and 34% of institutional decision makers are unfamiliar with smart beta funds, according to Cogent and PowerShares.
Eight of the top-10 PowerShares ETFs in terms asset gathering over the past year can be considered smart-beta ETFs, including the PowerShares Buyback Achievers Portfolio (NYSEArca: PKW), PowerShares FTSE RAFI US 1000 Portfolio (NYSEArca: PRF) and the PowerShares S&P 500 High Beta Portfolio (NYSEArca: SPHB).
Data Courtesy: Cogent Research, PowerShares