Looking ahead, Sara Shores, Global Head of Smart Beta for BlackRock, anticipates four major developments in the smart beta ETF space in the year ahead: The revival of risk-seeking factors. Multi-factor strategies will be in the limelight. Smart beta finally filling out some fixed-income strategies. A greater importance of smart beta in a diversified investment portfolio.
Shores in a research note argued that a firming global economy and a pickup in corporate earnings are fueling pro-growth sentiment and reflationary themes, which have caused investors to become less defensive and more risk-seeking. Consequently, Shores sees increased demand for risk-seeking factors, such as value strategies that are now returning to favor after years of underperformance.
Multi-factor strategies are also growing more prominent as a well-rounded, diversified way for investors to mitigate cyclicality.
“A multi-factor strategy, which combines factors with low correlation to each other, has the potential to perform well under a variety of market conditions,” Shores said. “Indeed, I like to say that diversification is the first rule of investing, and it’s no different with factor investing. As investors look for higher returns, multi-factor strategies are bound to become a popular avenue for potentially consistent and cost effective incremental returns.”
Smart beta equity ETFs have quickly developed, but the smart beta fixed-income ETF space remains conspicuously vacant. Bond investors, though, are beginning to look for ways to diversify increased risks after a three decade-long bull rally in the fixed-income market, which may leave room for innovation in the smart beta fixed-income ETF category.