Smart-beta strategies that try to deliver enhanced returns or diminish market risks through alternative indexing methodologies have been the hot-button topic in the exchange traded fund industry.
For instance, at the recent Inside ETF Conference, smart-beta ETFs were center stage, with analysts and industry experts pouring over the investment styles and fund sponsors promoting new options for targeted market exposure.
The increased presence of the smart-beta ETF space corresponds with the increased demand, writes Todd Rosenbluth, S&P Capital IQ Director of ETF Research, in a note. For instance, of the institutional investors who are utilizing smart-beta ETFs, 59% plan to increase their exposure to the strategies in the year ahead, according to a recent Greenwich Associates study.
Kal Ghayur, head of the ActiveBeta Equity business with Goldman Sachs Asset Management, said that institutional investors are focusing on factor-based, smart-beta strategies, pointing to the appeal of factor diversification to diminish risks of underperformance.
Established names like BlackRock’s iShares and Invesco PowerShares have expanded their smart-beta lines while traditional mutual fund players like Goldman Sachs and JPMorgan are stepping up to bat with their own offerings tied to proprietary indices. [A Closer Look at the RAFI Fundamental ETF Strategy]
The quickening expansion into smart beta is seen as an evolution away from traditional cap-weighted indexing methodologies to a next-gen approach to factor-based investments, according to Craig Lazarra, global head of index investment strategy for S&P Dow Jones Indices.
Nevertheless, Anthony Davidow, vice president and the alternative beta and asset allocation strategist at the Schwab Center for Financial Research, warned that smart-beta ETFs won’t always work as various market conditions could cause the strategies to underperform. For instance, while low-volatility ETFs may outperform broader markets during times of distress, an extended market rally could cause these more conservative low-vol strategies to underperform. [Low-Volatility ETFs Attract as Markets Tumble]
Joel Dickson, global head of investment research and development, and a principal in Vanguard’s Investment Strategy Group, also compared smart beta offerings to the “indexification of active management,” but he also warned that investors should still perform their due diligence as no two ETFs are alike.
“With so many different smart-beta products now available for investors to sort through, S&P Capital IQ thinks understanding what’s inside is particularly important,” Rosenbluth said. “Since ETFs track different indices, the exposures they provide, along with their returns will be different.”
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.