Indexers Sees Further Growth for Smart-Beta ETF Strategies

Smart-beta or alternative index-based exchange traded funds have quickly attracted the investment community’s attention and may act as major pillar of growth for the ETF industry ahead.

“Every index provider understands that this will be the future,” Raman Aylur Subramanian, MSCI’s head of index applied research, told ETF Trends. “It will be factor-based investing.”

Smart-beta ETF adoption has been gaining momentum among retail investors, financial advisors and even institutional investors. Retail investors and financial advisors have contributed to the first leg of the ETF industry’s growth spurt, and institutional investors could support ETF growth ahead.

“We do have too many ETFs but Indexing can get more creative. We need to find the right balance.” Ron Bundy, CEO Benchmarks North America of FTSE Russell, told ETF Trends in a call. “There’s a space for artificial intelligence in indexing but it really is active management, just not directed by humans. If its rules based and you can be transparent, it can be indexed.”

According to a recent FTSE Russell smart beta survey, global institutional asset owners currently evaluating smart beta have doubled to 36% in 2016 from 15% at the first survey in 2014, and 62% of asset owners with an existing smart beta position are now considering additional allocations.

Related: ETFs Gain Ground as Advisors Look to Passive Beta-Index Strategies

Close to 70% of asset owners also take a long view on smart beta, planning to utilize smart-beta options five years or longer to achieve their long-term investment objectives. The rising adoption reflects asset owners’ preference for return enhancement and risk reduction.

The smart beta survey of global asset owners also revealed a developing trend in asset owners’ views and usage of smart beta strategies. The percentage of asset owners that tracking five or more smart beta indices have increased significantly to 21% in 2016 from 2% in 2014.

Due to the increased usage of smart-beta strategies, we are also witnessing traditional open-end active fund managers tiptoe into the ETF industry with smart-beta options of their own.

“Smart beta strategies are active management’s response to smart beta ETFs; it’s the only way for them to enter the space,” Rolf Agathar, Managing Director of North American Research at FTSE Russell, told ETF Trends in a call.