Exchange traded funds are a relatively new innovation in the financial industry. As more people learn about the benefits of the ETF investment vehicle, ETF adoption has risen and assets have grown.
Now, financial advisors are showing greater interest for the new breed of smart-beta ETF options, potentially signalling a growth spurt for the alternative index-based ETF segment.
“We are hearing a number of sophisticated questions,” Theresa Brennan, Regional Vice President of ETPs for Deutsche Asset Management, told ETF Trends in a call.
Brennan pointed out that when ETFs first hit the scene, Deutsche Bank was fielding basic questions that introduced people to ETFs’ indexing methodology.
Now, advisors are asking more technical questions, which reflects a growing interest for the underlying smart-beta ETF strategies and how the funds may enhance an investment portfolio.
“Advisors are considering distinct differences between various strategies,” Brennan said.
Related: ETFs Gain Ground as Advisors Look to Passive Beta-Index Strategies
For instance, advisors are diving heavily into the various factor components of multi-factor, smart-beta strategies, according to Brennan.
“Advisors want to know how a factor has affected performance or enhanced returns,” Brennan added.
[related_stories]Robert Bush, Investment Strategist at Deutsche Bank, also saw multi-factor, smart-beta ETFs as a means to generate alpha or enhance returns while smoothing out the ride. Smart-beta ETFs may capture upside in a market rally and limit potential drawdowns during market sell-offs, helping investors enjoy better risk-adjusted returns.
“Smart-beta ETFs offer higher alpha with similar volatility” to traditional beta funds, Bush told ETF Trends.
Financial advisors’ more meticulous research into smart-beta ETFs reflects their growing interest for the investment strategies, especially as alternatives to more costlier actively managed open-end funds.
According to the annual 2016 Trends in Investing Survey conducted by The Journal of Financial Planning and the FPA Research and Practice Institute, 83% of advisors use and/or recommend ETFs to clients as the current “preferred investment vehicle” among 18 available options, compared to just 40% of advisors back when the first survey was conducted in 2006.
Related: Indexers See Further Growth for Smart-Beta ETF Strategies
Due to their passive nature, management fees are at a bare-bones minimum, which has made ETFs relatively more attractive to active mutual funds on a fees basis. ETFs provide daily disclosure on their holdings. Additionally, the funds are traded like a stock and can be easily accessed through a normal brokerage account.
The increased interest among investors, advisors and institutions has also contributed to index providers’ outlook on smart-beta index strategies, with major indexers like MSCI, FTSE Russell and S&P Dow Jones Indices creating more customized indices to be used as benchmarks for ETFs.