Due to their factor-based styles, some smart-beta ETFs tend to generate out-performance, come with lower fees and diminish volatility. However, institutional players point to some drawbacks, including under-performance due to market timing, increased time spent on due diligence, lack of long-term track records and difficulty in comparing performance to traditional benchmarks.
In a recent ETF Trends survey, the majority of financial advisors indicated that they are investing in smart-beta ETFs to generate better risk-adjusted returns with two-thirds of advisors surveyed saying they believe smart beta ETFs can help damp volatility and boost performance. [Big Investors Embrace Smart Beta ETFs]
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.
The survey, entitled Smart Beta: A Deeper Look at Asset Owner Perceptions, indicated institutional investors 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.