Smart beta or factor-based index exchange traded funds have been losing momentum as traditional low-cast, plain vanilla index strategies regain the spotlight.
In 2021, investors funneled $131 billion into so-called strategic beta ETFs, which include components based on investment factors like momentum, minimum volatility, value, and growth, the Financial Times reported. The inflows were up 12% year-over-year in 2021 compared to 2020, which was higher than the “low single-digits” organic growth rate for the previous 12 months, according to Morningstar data.
Strategic beta ETFs now make up about 20% of the overall ETF market, or a little less than the high of nearly 22% at the end of 2019.
“It’s found its place within the broader [ETF] menu,” Ben Johnson, director of global ETF research at Morningstar, told the Financial Times.
However, Johnson argued that ETF providers could be culling their suite of smart beta strategies since many segments of the market have become “saturated, if not oversaturated.”
The state of the smart beta ETF segment is evident in the lower number of new offerings coming to market. Only 17 strategic beta ETFs were launched in 2021, the lowest number since 2009, when just seven came out, according to Morningstar. Meanwhile, 11 smart beta ETFs closed, the fewest since 2016. Overall, 179 factor-based strategies have closed over the past five years.
Johnson projected that sponsors could close down multi-factor strategic beta products that were built as a “stop-gap” measure for active mutual fund managers who were looking into ETFs but were not ready for their own fully active strategies.
Managers may reassess products “collecting dust on the shelf, given the complete change in appetite” for active management, Johnson added.
Nevertheless, the overall growth trends remain positive.
“We’re still in a phase of rapid growth,” John Hoffman, head of Americas ETF and indexed strategies at Invesco, told the Financial Times.
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