2017 Could Be a Great Year for Smart Beta ETFsWithin 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.

For example, among the smart-beta ETFs that recently came to market, the iShares FactorSelect MSCI USA ETF (NYSEArca: LRGF) and SPDR MSCI USA StrategicFactorsSM ETF (NYSEArca: QUS) have been excellent ways to capture core U.S. market exposure. As opposed to traditional market cap-weighted index funds, the two smart-beta offerings focus on quality and value. Additionally, QUS includes low volatility and equal-weight styles while LRGF incorporates momentum and size factors.

Not to be left behind, traditional mutual fund providers have also stepped into the ETF arena with smart-beta offerings. For instance, the Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF (NYSEarca: GSLC), JPMorgan Diversified Return US Equity ETF (NYSEArca: JPUS) and John Hancock Multifactor Large Cap ETF (NYSEArca: JHML) all screen for specific market factors.

JPUS focuses on quality, value and momentum attributes. GSLC targets low-volatility along with the same three factors as JPUS. JHML focuses on size, value and quality.

“We expect 2017 will be a year when more advisors seek out multi-factor ETFs that feel more like active management than IVV and its market-cap weighted peers, but are cheaper than the 1.1% for a large-cap mutual fund. If they do, we hope they finish their homework and look inside the portfolios first,” Rosenbluth added.

For more information on multi-factor strategies, visit our smart beta category.

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