Indexers Sees Further Growth for Smart-Beta ETF Strategies

Among the most recent smart-beta innovations, index-based ETFs have integrated ESG principles, or companies that adhere to environmental, social and governance practices. For example, Columbia Threadneedle Investments recently launched the Columbia Sustainable U.S. Equity Income ETF (NYSEArca: ESGS), Columbia Sustainable International Equity Income ETF (NYSEArca: ESGN) and Columbia Sustainable Global Equity Income ETF (NYSEArca: ESGW), which are based off customized MSCI indices.

Investing in ESG principles is a good way to help manage portfolio risks. Academic research revealed that strong governance mechanisms have helped diminish default risk and lower bond yields. Barclays also recently discovered that investment-grade bonds with higher ESG scores outperformed those with low ESG scores over the past 8 years.

Subramanian pointed out that sovereign funds, institutional investors and millennials have shown interest for the new breed of smart-beta strategies like those that track ESG principles.

For instance, the SPDR MSCI ACWI Low Carbon Target ETF (NYSEArca: LOWC) and the iShares MSCI ACWI Low Carbon Target ETF (NYSEArca: CRBN), which include ESG screens, were created for the United Nations Joint Staff Pension Fund.

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Global pensions and institutional investors have been shifting toward more socially responsible investments, diminishing their exposure to the energy sector in favor of more sustainable opportunities.

Moreover, millennials who may have a more green mindset have also been known to align personal beliefs with investment objectives, which could support ESG and socially responsible investment themes.

Alternative fixed-income strategies are also beginning to attract greater attention.

“Income-oriented indexing is in demand,” David Blitzer, Managing Director and Chairman at S&P Dow Jones Indices, told ETF Trends. “There is an appetite for more income solutions and we’re seeing it with fund flows globally.”

According to State Street Global Advisors data, fixed-income ETFs have taken in assets at a record setting pace this year, amassing $25 billion more by June compared to the same period last year. After attracting $8 billion in June, bond ETFs now outpaced equity funds by $50 billion in inflows year-to-date.

For more information on index-based ETFs, visit our indexing category.