Smart beta or alternative index based investment strategies in the exchange traded fund universe have been a huge hit with market participants and may continue to become a big component in many more investor portfolios.
According to a new FTSE Russell survey, Smart beta: 2017 global survey findings from asset owners, the percentage of asset owners reporting an existing smart beta index allocation has hit a new peak of 46%, compared to 36% last year, revealing a trend that shows increasing global growth and adoption of smart beta continuing into 2017.
The survey’s findings also suggest that the number of asset owners looking into smart beta remains robust and is made up of first-time evaluators, re-evaluators and asset owner’s considering adding onto their existing smart beta positions.
While costs remain a big factor in the ongoing shift into low-cost, index-based ETFs, many surveyed smart beta investors are also looking at these products to enhance returns and better manage risk.
Smart beta investors are also increasing their allocations in multi-factor combinations as these multi-factor indices are the most widely evaluated. Nevertheless, investors still favor some single-factor methodologies, such as value and low-volatility.
More are looking back into smart beta strategies after the financial industry conducted a blitz in education. According to survey findings, 75% of respondents pointed to an increased understanding through new information and education as the main reason for evaluating smart beta strategies again, followed by new types of smart beta strategies, broader industry acceptance and longer track record.
A greater number big and institutional investors are also utilizing these smart beta strategies, with the largest rise in smart beta adoption this year among asset owners with $1 to $10 billion in assets under management, compared to the the largest rise in adoptions among owners with less than $1 billion last year.
As smart beta seeps into mainstream investment ideas, many view the strategies as alternatives for actively managed funds.
“Smart beta indexes are widely accepted by asset owners as an appropriate basis of an investable product, with 77% agreeing,” according to FTSE Russell. “Roughly half of asset owners view smart beta indexes as an appropriate benchmark for an active strategy.”
Among the more popular smart beta strategies, those surveyed revealed strong interest in applying ESG or Environmental, Social and Governance principles to investments, or better known as smart sustainability. In North America and Europe, interest in smart sustainability index-based strategies is the greatest among asset owners with assets under management of greater than $10 billion.
“Our fourth annual smart beta survey demonstrates asset owners have readily adopted smart beta indexes and continue to evolve their strategies based on these indexes,” Rolf Agather, managing director of North America research, FTSE Russell, said in a note. “Asset owners and consultants continue to increase their understanding of smart beta and are now harnessing the full spectrum of smart beta tools available. The survey results suggest that growth in smart beta is likely to continue at a robust pace. Responses indicate that adoption expectations of asset owners currently evaluating initial or additional smart beta index allocations remains strong and satisfaction with smart beta among current users remains high.”