By Paula Wieck, CLS Investments
Innovation in the development of financial tools has been tremendous over the last several decades. There have been advances in robust risk-modeling software, algorithmic trading, and the evolution from investment vehicles, such as mutual funds with various front-end and back-end loads to low-cost ETFs.
The ETF industry continues to experience exponential growth and has seen inflows of $380 billion in 2017 so far. As ETFs gain favor with investors, innovation is accelerating. When ETFs first launched in the early 1990s, they were developed as short-term trading vehicles that allowed investors to quickly gain exposure to broad-market baskets at intra-day pricing.
These days, enhanced indexing, also known as smart beta, is growing in popularity. This systematic, rules-based approach attempts to isolate particular factors or themes that are proven to add incremental value over time and are necessary to correct some of the pitfalls of market-cap-weighted exposure.
CLS was one of the earliest adopters of ETFs, and we are committed advocates of smart beta ETFs. Today, about 50% of our equity exposure is composed of smart beta selections. As the ETF industry continues to evolve, however, we have seen active ETFs grow in popularity as well.
Active ETFs have many of the advantages of both mutual funds and traditional ETFs. They provide a lower-cost solution that offers investors access to renowned active managers’ expertise. They also allow ETF investors the flexibility to choose a combination of passive, enhanced, and active vehicles without leaving the ETF universe. With active ETFs, investors can get professional money management, lower costs and expenses, greater transparency, and trading flexibility.