2017 Could Be a Great Year for Smart Beta ETFs

Within the exchange traded fund universe, the smart-beta or alternative index-based segment is quickly attracting a large following, and more investors and advisors are expected to steer toward these factor-based strategies ahead.

“CFRA thinks 2017 could be the year when advisor and investor adoption takes off, based in part on 2016’s performance,” Todd Rosenbluth, Director of ETF Research at CFRA, said in a research note.

Over the past few years, money managers and fund sponsors started to roll out rules-based, transparent index ETFs that combined some of the attributes that have historically provided active managers with outperformance, such as prominent investment factors like quality, momentum, value, low volatility and size.

This quickly growing segment of the ETF space has been able to sop up the money flowing out of traditional open-end mutual funds as years of underperformance and high expenses dissuade investors – active equity mutual funds shed about $100 billion in the first 11 months of 2016, or more than the combined outflows in the previous three years, according to Morningstar data.

“CFRA thinks asset managers were correct to have established products for those seeking lower cost alternatives,” Rosenbluth said.