Smart beta exchange traded funds that follow rules-based, customized indexing methodologies in an attempt to enhance returns and limit downside risks are quickly becoming a hot spot for new investment money.
According to ETFGI data, investors funneled $77.6 billion into smart beta ETFs over 2018, up 12.4% on the net inflows of $69.1 billion in the year prior, the Financial Times reports.
There are now 822 enhanced U.S.-listed ETFs that track indexing methodologies outside of traditional market capitalization weighting, with $759.4 billion in assets under management, according to XTF data. To put this in perspective, there are 2,265 U.S.-listed exchange traded products on the market with $3.6 trillion in assets.
Meanwhile, traditional market capitalization-weighted ETFs experienced a drop of 30.5% in net inflows over 2018 year-over-year as the equity markets experienced heavy losses amid volatile trading.
Many big ETF players have been enjoying their ride on the smart beta bandwagon. BlackRock attracted $29.9 billion in new cash for its smart beta ETFs in 2018, up 39%. Vanguard added smart beta inflows of $17.8 billion last year, up 32% year-over-year. Invesco, one of the first to step foot in smart beta ETFs, only added $1.5 billion to its smart beta lineup, or down 28.6%.
The smart beta segment is growing increasingly competitive as close to 500 new smart beta ETFs launched by 145 managers last year alone. ETF investors have been the ultimate winners as the increased competition has helped push down fees.
The time-tested strategies implemented by smart beta ETFs, coupled with the low investment fees are now causing a number of investors to question traditional investments that implement these factor-based plays. For example, the quickly rising popularity of smart beta strategies has affected some hedge fund managers that try to exploit the same pricing anomalies found in factor-based, smart beta ETFs. Many are now looking at smart beta ETFs as a way to gain institutional level investments at a fraction of the cost of traditional avenues.
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