Smart Beta: The Next Step in ETF Investment Strategies

There are now over 2,000 U.S.-listed exchange traded funds with about $3 trillion in assets under management. Contributing to this rapid growth, a new breed of smart beta or factor-based index ETFs has quickly hit the scene.

Supporting the continued growth of smart beta ETFs, large institutional investors have taken a bite of the new strategies as a way to potentially enhance returns or diminish risk in their portfolios.

The share of institutional ETF users investing in smart bet ETFs increased to 37% in 2016 from 31% in 2015 according to Greenwich Associates. In 2016, 41% of asset managers invested in these smart beta funds, and half of investment consultants said their clients used them.

What exactly are smart beta ETFs? Smart beta ETFs are investments that are exposed to factors, Andrew Ang, Head of BlackRock’s Factor Based Strategies Group, said in a research note. These factors are historically persistent drives of returns within and across various asset classes, and strategies with targeted factors can be allocated alongside traditional investment portfolio positions to potentially improve a portfolio’s outcome.