It isn’t just the mom and pop investor looking for smart beta ETFs. The strategies are finding their way into more institutional portfolios. About 65% of U.S. pension funds, including corporate pensions, public pensions, foundations and endowments surveyed by Greenwich Associates are buying and holding ETFs for two years or longer. Looking overseas, European institutions are exhibiting an increasing appetite for factor-based ETFs.

With traditional cap-weighted stock indices pushing toward record highs, more investors are concerned about potential corrections or volatility that could shake up their portfolios. Consequently, more are turning to these smart beta ETFs as a way to potentially generate improved risk-adjusted returns.

For instance, the VanEck Vectors Morningstar Wide Moat ETF (NYSEArca: MOAT), which implements Morningstar’s economic moat rating to identify strong companies with wide economic moats, and can help investors achieve improved long-term, risk-adjusted return by focusing on quality companies that help limit downside risk while still participating in potential gins. From late 2002 through the end of the second quarter, the strategy has delivered an average 4.7 percentage points of annual outperformance relative to the benchmark Morningstar U.S. Market Index.

According to Morningstar’s indexing methodology, there are five sources of economic moats: Intangible assets that include brand recognition to charge premium prices. Switching costs that make it too expensive to stop using a company’s products. Network effect that occurs when the value of a company’s service increases as more use the service. A cost advantage helps companies undercut competitors on pricing while earning similar margins. Lastly, efficient scale associated with a competitive advantage in a niche market.

Financial advisors who are interested in learning more about factor-based investments can register for the Tuesday, September 12 webcast here.