Smart Beta ETF Assets to Reach $1trn by 2020

Shanny Basar

Nizam Hamid, head of strategy at exchange-traded issuer WisdomTree Europe, has predicted that assets in smart beta ETFs will reach $1 trillion by the end of this decade despite outflows from equity ETFs in the first half of this year.

Smart beta strategies do not follow a standard market cap-weighted index but instead follow indexes based on factors, such as momentum, quality, size, and value.

Hamid said in a statement that 40% of total flows into European ETFs so far this year have gone into smart beta products, as investors become more sophisticated and look for specific solutions rather than simply allocating to whole markets.

“An even more compelling statistic is that whilst European market capitalisation ETFs suffered outflows of $9.1bn (€8.2bn) in the first half of this year, smart beta and alternatively weighted strategies had net inflows of $5.7bn,” Hamid added.

He cited Morningstar Direct data which said smart beta equity ETFs listed globally gathered $77bn for the whole of last year, taking total assets in the products to $486bn.

“If this current level of growth was maintained, it means the industry would push past $500bn by the end of 2016, and reach nearly $800bn by 2020,” he said. “However, I expect the figure will actually be a lot nearer to $1 trillion by the end of the decade, mainly because of two powerful trends: the desire for tailored ETFs and for low-cost alternatives to active funds – are now firmly in play.”

Smart beta ETFs listed globally reached a new record of $429bn at the end of June 2016, according to data from independent research and consultancy firm ETFGI. The consultancy said in a report that in the first half of this year smart beta equity ETF assets have increased by 7.1% thanks to inflows of $16.15bn, resulting in a five-year compound annual growth rate of 31.3%.

Volatility factors gathered the largest net inflows with $14.32bn to the end of June, followed by value factor with $6.83bn and then dividend factor-based products with $3.09bn.

In addition to inflows into smart beta ETFs, both oil and gold products gathered assets last week. ETF Securities, the European ETF issuer, said in a report that last week investors increased exposure into long oil ETPs by $113m, the most since March 2015 as the price of WTI crude oil fell below $40 per barrel.

There were also $74.4m inflows into gold ETPs last week.

“While initially rising due to monetary expansion in the UK and fiscal expansion in Japan, gold slid following a bullish US non-farm payroll release,” added ETF Securities. “The recent decline could generate a fresh-round of buying as investors seek to shore up hedges in their portfolio.”

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