Lower Fees, Education Are Key Components to Smart Beta Adoption

Smart beta is gaining more traction in the capital markets and in order for that to continue, it will have to be a two-punch combination of lower fees and education that will drive more awareness moving forward.

“There are probably several drivers behind increased adoption, but I think the elephant in the room is lower fees,” said Bernie Nelson, chief research advisor at Style Analytics, in Pensions & Investments. “Most smart beta and factor products are being positioned between traditional active and very low-cost, nondiscretionary passive, in terms of fees as well as active risk. From a fiduciary perspective, there has to be an obligation to examine whether a lower-fee product could provide an appropriate investment solution.”

Fees, alone, don’t represent the sole driver for smart beta adoption. More education on these smart beta strategies is making investors more aware of what their uses in a portfolio.

“If you go back 20 years, the strategies that are today called risk premia or alternative beta strategies were the inherent ingredients of a hedge fund,” said Oliver Schupp, Head of Investor Relations, North America at Capital Fund Management (CFM). “It could be long/short value and momentum investing in equities, it could be merger arb, it could be trend following, or it could be harvesting volatility. Those were hedge fund strategies for which investors happily paid 2 and 20. What I think happened is that these strategies have been researched well and therefore made essentially public. That’s my rationale for why these strategies have been repriced so dramatically, as they have been. “

“You can assume that no institutional investor pays more than 100 basis points flat without any performance fee for a collection of these risk premia, and I think the real number is lower, 70 or 80 basis points,” added Schupp. “That’s where the sweet spot is for most of these transactions, and I think it’s been driven by investors who said, ‘We like the exposure. We don’t want to pay, so if you can do it for that price, great, but otherwise we’ll try it ourselves.’ And some do both.”

Value Options in Today’s Market

One ETF option is the Deep Value ETF (NYSE: DVP), which seeks to track the price and total return performance of the Deep Value Index. The index is composed of the common stock of typically 20 companies included in the S&P 500 that have been selected through a proprietary ranking system developed by the fund’s index provider, that evaluates the earnings and cash flows of each company to create a final universe of companies that are deeply undervalued as compared to the S&P 500 overall.

Another option is the Vanguard Value Index Fund ETF Shares (NYSEArca: VTV). VTV seeks to track the performance of a benchmark index that measures the investment return of large-capitalization value stocks.

For more market trends, visit ETF Trends.