Smart Beta ETFs: Not Too Passive Or Active, But Just Right | ETF Trends

Smart beta strategies have filled a hole present in the ETF industry, closing the gap between passive index-based investing and active management.

The growing category of smart beta ETFs incorporate insights found within actively managed funds into a rules-based indexing methodology. These smart beta ETFs cover popular themes like value, momentum, low volatility and quality to diversify risk and potentially enhance returns.

“Since the start of the year, there has been a strong preference for defensive and risk-mitigating factors,” Manuela Sperandeo, managing director at iShares, BlackRock’s ETF provider, told the Financial Times.

These newly developed systematic indexing strategies typically include characteristics that help generate outperformance over time.

“Advancements in data allow a very granular picture of companies and the ability to get deeper insights for index creation,” Sperandeo added.

Slowdown In A New Strategy

However, a slowdown in a new strategy launches has caused some to believe that the market may be saturated. The slowdown in funds launched in 2018 also came with a pause in the growth of US assets under management to slightly less than $900 billion, according to Morningstar. So far this year, only 54 U.S. and European funds were launched, compared to 103 in 2018 and 184 in 2017. A shift into value and dividends, though, helped push smart beta assets over $1 trillion.

Investors continue to shift money into the efficient and easy-to-use ETF investment vehicle. A major selling point has been the ETFs’ tax advantage over mutual funds.

“ETFs have always been a more tax-efficient way to package an investment strategy. Unlike traditional mutual funds structures, they can avoid capital gains taxes as the sale of instruments takes place outside the fund itself,” Grant Engelbart, director of research at CLS Investment, told the Financial Times.

The smart beta ETF segment could find increased competition ahead after regulators approved the first “non-transparent” ETF structure, which could attract more active managers over to the ETF space.

For more information on alternative index-based strategies, visit our smart beta category.