As more investors become comfortable with exchange traded funds, many are turning to enhanced index-based or smart-beta ETFs to capture improved risk-adjusted returns to adapt to a shifting marketplace.
On the upcoming ETF Trends Virtual Summit on January 20, 2016, financial advisors will be able to hear from industry experts on the rise of factor-based benchmark construction, advantages of smart-beta indexing and how to position for 2016 with index funds that have broken from the traditional market-capitalization methodology.
According to Invesco’s (NYSE: IVZ) PowerShares unit, the fourth-largest U.S. ETF issuer, and Market Strategies International, the use of smart beta ETFs by professional investors continues climbing. Institutional investors, including public and private pensions, endowments and registered investment advisors (RIAs), are increasingly favoring the alternative weighting methodologies made available by smart beta ETFs. [Draper, Feyerer Discuss Growth of Smart Beta ETFs]
The FTSE Russell Smart Beta: 2015 Global Survey Findings from Asset Owners survey also indicates institutional investors are boosting adoption of smart beta ETFs. [No Denying the Rise of Smart Beta ETFs]
Mark Makepeace, chief executive of the FTSE Group, points out that traditional market capitalization-weighted passive investments make up 30% of money invested in major equities markets, leaving active managers with 70%, and a growing number of investors are taking an interest in alternative, factor-based index funds. Makepeace also contends that since a lot of money is already being managed in a factor-based style among active managers who charge exorbitant fees, investors may, instead, turn to cheaper factor-based index ETFs. [Smart-Beta ETFs Could Give Active Managers A Run for Their Money]
There are currently about 480 enhanced index-based U.S.-listed ETFs on the market with $247.2 billion in assets under management and an average expense ratio of 0.61%, according to XTF data.
One of the ETFs that kick-started the smart beta movement is the PowerShares FTSE RAFI US 1000 Portfolio (NYSEArca: PRF), which celebrates its tenth anniversary in December. The RAFI strategy weights stocks based on fundamental measures, including book value, cash flow, sales and dividends, as opposed to the traditional market-capitalization methodology, which would overweight the best performing stocks.
Among factors emphasized by smart beta funds, low volatility and value were the most popular among the professional investors surveyed by FTSE Russell. Importantly, investors plan to hold smart beta ETFs for the long term.
BlackRock’s iShares also sees investors incorporating portfolios through single-factor and multi-factor strategies. Single-factor strategies help tactical traders to tailor exposures and implement specific views or control portfolio exposure. Additionally, multi-factor strategies provided a more broad or diversified approach. [How to Implement a Factor-based Smart Beta Investing Strategy]
Financial advisors who are interested in learning more about smart-beta index ETF strategies can attend the ETF Trends Virtual Summit, an online event, on January 20, 2016.