Smart beta or alternative index-based ETF strategies have quickly grown as institutional investors begin to adopt the various methodologies in an attempt to enhance their portfolios or better manage risks.
FTSE Russell’s recently conducted its fifth annual global institutional asset owner smart beta survey and tried to find insights into major investment trends over recent years around the awareness and popularity of smart beta index-based investments among global institutional investors.
“While some results from this year’s survey serve to reconfirm long-term growth in awareness and usage of smart beta indexes, others highlight areas that are continuing to emerge. Notably, awareness and usage of multi-factor and ESG smart beta indexes are growing in recent years. And our survey notes some differences between investors across markets, specifically the US, UK and Canada,” Rolf Agather, Managing Director of North America Research, FTSE Russell, said in a note.
According to its recent findings, 91% of asset owners globally have included smart beta allocations, have evaluated or are planning to evaluate smart beta over the next 18 months. Among those with an existing smart beta allocation, 65% are evaluating additional allocations, and 37% of asset owners who had previously evaluated smart beta and decided not to invest are currently re-evaluating their options.
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The survey revealed a 16% jump in implementation or or consideration of smart beta usage over past five years, but over 0% of asset owners in the U.S. and U.K. remain uncertain on the best approach, which reveals the ongoing need for education to cover the various strategies now available. In contrast, when the survey was first fielded back in 2014, 75% of asset owners had a smart beta allocation, evaluated or were planning to evaluate smart beta. Since first measured in 2015, the overall usage of multi-factor combination smart beta index-based investment strategies among global asset owners has more than doubled.
Survey participants also revealed multi-factor combination smart beta strategies were used by 49%, compared to 20% when the question was first posed in 2015. Additionally, 70% of those surveyed said they are currently evaluating multi-factor combination smart beta, which overtook all other strategy choices. Notably, U.S. and U.K. asset owners exhibited more interest in multi-factor smart beta index-based strategies, but the lack of education was cited as a major barrier to implementation.
Of particular note, interest in fundamentally weighted strategies has declined. In 2018, 19% of surveyed asset owners with an existing smart beta allocation are using fundamental strategies, compared to 41% when first measured in 2014.
Looking Ahead to ESG Strategies
Looking ahead, ESG or investments that are based on environmental, social and governance principles have also garnered more attention. Almost 40% of survey participants anticipated incorporating ESG to a smart beta strategy in the next 18 months, with nearly half of respondents showing interest for performance reasons and not just for socially responsible asset allocations or societal good. There was a notable increase in interest, with 44% surveyed considering ESG for performance reasons in 2018 or a 13% rise from 2017 when ESG smart beta index awareness and usage was first measured.
“Multi-factor strategies are reported as the most widely implemented smart beta strategies, particularly among asset owners who have adopted smart beta in the last two years. They are also the most commonly evaluated type of smart beta strategy, so we expect to see continued growth in multi-factor strategy adoption rates,” according to FTSE Russell.
For more information on alternative index-based strategies, visit our smart beta category.