There is no denying the asset-gathering acumen of alternative-indexed or smart beta exchange traded funds.
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. [Flows Show Investors Favoring Smart Beta ETFs]
Along with the increased inflows to intelligent index ETFs have come an increased amount of critics.
“Now, on the heels of success, come analyst concerns. Some critics contend that smart beta funds often deliver less than promised, may not efficiently track their indexes and have liquidity issues,” reports Aparna Narayanan for Investor’s Business Daily.
As IBD notes, Morningstar has opted for the term “strategic beta,” which makes sense as many issuers of these non-cap weighted ETFs are doing just that: Applying an element of strategy to passive management that is usually absent from traditional cap-weighted offerings.
Despite the debate over what to call these ETFs, what cannot be assailed is their increasing prominence in the ETF universe. Institutional investors are increasing their adoption of alternatively weighted or factor-based exchange traded funds, according to a survey released by Russell Investment’s in April. [Russell Says More Institutions Using Smart Beta ETFs]
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.
“A study conducted by Cogent Research, a division of Market Strategies International, indicates that more than half (53%) of institutional decision makers will increase their use of smart beta ETFs over the next three years—that’s more than any other ETF category, including market cap-weighted ETFs (48%),” according to WisdomTree.
Of the six largest U.S. ETF issuers, three – Invesco’s (NYSE: IVZ) PowerShares, WisdomTree (NasdaqGS: WETF) and First Trust – feature fund lineups that are dominated by strategic beta offerings. Additionally, iShares and State Street Global Advisors, the two largest U.S. ETF sponsors, are increasing their alternatively-index lineups. [Smart Beta ETFs Could Lift These Stocks]
WisdomTree has 10 ETFs with over $1 billion in assets under management, nine of which can be considered strategic beta ETFs.
First Trust offers nearly 40 AlphaDEX ETFs, a group of strategic beta funds based “on growth factors including three, six and 12-month price appreciation, sales to price and one year sales growth, and, separately, on value factors including book value to price, cash flow to price and return on assets,” according to First Trust.
Those ETFs have been primary drivers of First Trust’s rapid asset growth. PowerShares, the fourth-largest U.S. ETF issuers, features over 50 broad market, dividend, industry or sector funds that can be defined as strategic beta products. [AlphaDEX ETFs Drive First Trust’s Growth]