The exchange traded fund universe is continuously evolving as innovative strategies and investment styles are translated into the efficient investment wrapper, and financial players have also changed to adapt to the quickly shifting industry.
Tom Lydon, Editor and Publisher of ETF Trends, was on The Resilient Advisor with Jay Coulter to speak about changes in the ETF industry.
The U.S. ETF industry has almost three trillion in assets under management. Over past decade, the industry has seen a trend where more investors and advisors have shifted away from traditional actively managed mutual funds into passive index-based ETFs.
“It really is exploding,” Lydon said.
Further fueling the growth, the industry has not only seen an explosion in growth of pure beta or traditional passive ETFs but also rising interest for smart beta or factor-based strategies, rules-based indexing methodologies that specifically screen for specific factors.
“With these strategies, they offer a little bit more discipline in a whole variety of ways, but with that comes a lot more need for education,” Lydon said.
Lydon explained that the so-called smart beta strategy is a broad generalization of anything that is not a traditional market cap-weighted indexing methodology. So something as simple as an equal-weight or value-oriented indexing methodology may be considered “smart beta.”
As more companies get into the ETF game with many of the traditional benchmarks already claimed, new players are looking to differentiate themselves from the more established competitors by offering rules-based or factor-based smart beta ETFs. These factor or multi-factor strategies may incorporate screens like value, quality, dividends, size and volatility, or factors that have historically been proven to provide enhanced market returns and diminish portfolio risks.
“A lot more choice,” Lydon said. “There are over 2,000 ETFs today. Almost 600 billion dollars in smart beta ETF strategies. But as we talk to advisors all the time, they are just dying for more education and information about all the smart beta or intelligent index strategies that are out there because they’re just so many choices.”
For those who are interested in hearing the rest of the podcast, head over to The Resilient Advisor where Tom Lydon touches upon other topics like ETF costs, ETF strategists, yield-generating ETFs and others.