Institutional investors are increasing their adoption of alternatively weighted or factor-based exchange traded funds, according to a new survey by Russell Investments.
The survey, entitled Smart Beta: A Deeper Look at Asset Owner Perceptions, confirms that asset owners in North America and Europe are actively using smart beta indexes in strategic and tactical ways to pursue a variety of investment outcomes, according to the index provider.
Data confirm the rising popularity of smart beta or intelligent index ETFs. There were 335 such ETFs with nearly $300 billion in combined assets under management at the end of 2013. Smart beta ETFs “contributed a record $65.1bn of inflows in 2013 led by dividend-weighted funds, and nearly doubled the $34.2bn from last year,” said BlackRock. [Inflows to Smart Beta ETFs Continue]
Of institutional investors surveyed by Russell with more than $100 billion in assets, 88% “have evaluated smart beta or plan to do so in the next 18 months; 77% of respondents with assets between $1 billion and $10 billion, and 50% of those with assets under $1 billion responded similarly,” said Russell.
The survey shows nearly a third of professional money managers already have allocations to smart beta products and more than half of those managers plan to boost smart beta exposure over the next 18 months.
Russell’s findings jibe with those of financial services firms. 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 a study conducted last year by PowerShares, the fourth-largest U.S. issuer, and Cogent. [Bright Future for Smart Beta ETFs]
The Russell survey reveals the primary motivations for institutional investors increased usage of smart beta funds are risk reduction and boosting returns while “cost savings, cited just 15% of the time, ranked at the bottom of the list of motivating factors,” according to Russell.
Regarding the terminology used to reference smart of intelligent index products, for which there has been ample debate, “in North America, the most popular name was “alternatively weighted indexes” (33% of survey respondents preferred this name) while, in Europe, “smart beta” is the preferred name (35% of respondents),” said Russell. [WisdomTree on Smart Beta: Question the Name, not the Trend]
ETF Trends editorial team contributed to this post.