As more investors turn to alternative index-based strategies or smart beta ETFs, large players like BlackRock and Vanguard have been among the winners in the new grab for assets.
BlackRock smart beta assets have surged by almost 180% to $288 billion over the past five years, reports Attracta Mooney for the Financial Times. Only BlackRock and Vanguard have accumulated over $100 billion in smart beta products.
The rapid growth of smart beta in recent years “is sustainable for quite some time,” Rob Nestor, head of iShares smart beta at BlackRock, told the Financial Times, adding “we believe we are just in the early days of adoption.”
The smart beta ETF strategies have grown in popularity as more investors look to the nifty investment vehicle to capture what has been traditionally active styles in a cheap index-based fund wrapper to potentially enhance returns and diminish short-term risks.
Smart beta ETF providers have benefited from their position as the world’s leading ETF sponsors, incorporating their decades of experience in traditional factor-based investment styles taken from their active management team to craft their own factor-based index ETFs.
Looking ahead, the big will only likely grow bigger, leaving competitors in the dust.
“It will be exceedingly difficult for anyone to catch up,” Ben Johnson, director of global ETF research at Morningstar, told the Financial Times. “The lead they have could shrink a bit, but I don’t think anyone can overtake them.”
Related: A Multi-Factor, Smart Beta ETF for Long-Term Investors
An increasing number of investors have turned away from traditional open-end actively managed mutual funds as they grow weary of high fees and underperforming returns. Additionally, with the U.S. equity bull market extending, investors are now more apt to look to alternative strategies like smart beta to potentially generate improved risk-adjusted returns.
“There are a whole class of investors who are to some degree disillusioned with active management, but not so disillusioned that they are willing to simply own the market,” Johnson added. “They want something more.”
Investors may be steering toward known, big-name players in the smart beta ETF space because of the relative newness of the strategies. It will probably require more education before investors will take a dive into the deep end and browse through the various options from large and small players alike.
“Most investors may have heard a bit here or there, but they are just becoming familiar with how to use smart beta funds in portfolios,” Ryan Issakainen, ETF strategist at First Trust, told FT, adding “so there is plenty of room for growth.”
Two trending ETF plays are the Deutsche X-trackers MSCI EMU Hedged Equity ETF (NYSEArca: DBEZ) and the Deutsche X-trackers MSCI Germany Hedged Equity Fund (NYSEArca: DBGR), which are up an average of 14% year-to-date.
These Europe-related ETFs are attractively priced relative to U.S. markets. DBEZ shows a 14.9 price-to-earnings ratio and a 1.7 price-to-book while DBGR trades at a 14.0 P/E and 1.7 P/B. In contrast, the S&P 500 is hovering around a 19.9 P/E and a 2.8 P/B.
For more information on the ETF industry, visit our ETF performance reports category.