‘Smart Beta’ ETFs On the Rise in Europe 

Terry Flanagan

Changes in the European exchange-traded product market are likely to be far more dramatic than in the US, according to Hector McNeil, co-chief executive of Boost ETP, as new independent issuers launch and ‘smart beta’ funds increase.

Smart beta ETFs do not track standard market-cap weighted indices.

McNeil said in an email to Markets Media that Europe has not seen the emergence of many independent and specialist players, whereas in the US there are over 40 such providers. He noted there been some independent European success stories, such as ETF Securities and Source.

“It is likely that new, more specialist players will emerge and fill the void left by retrenching investment banks,” added McNeil. “This will be especially the case for innovative ETF investment strategies rather than straight beta.”

McNeil expects smart beta ETFs to increase and said strategies that have already been successful include those that weight indexes by dividend, by earnings, or by minimum variances and through equal weightings.

“Smart beta will allow the ETF industry to push the investment case for lower cost actively managed funds, especially where those strategies are proven by positive track records, for instance WisdomTree, with its seven years’ experience in this area,” he added.

Boost, the short and leveraged ETP provider, was acquired by WisdomTree, the US ETF issuer, this year to launch WisdomTree’s platform in Europe. WisdomTree has focused on smart beta products since 2006.

Amy Belew, managing director and head of global business intelligence for Global iShares at BlackRock said in a blog that more investors are starting to use smart beta strategies.

Belew wrote: “Specifically, we believe smart beta funds with a focus on minimum volatility will start to become even more popular as volatility has returned and is likely to persist in 2015.”

She said there were three major themes this year contributing to a record year for ETFs – the rise in assets in fixed income funds, record flows into Europe-listed ETFs and the performance of the US equity market.

Belew added that flows into Europe-listed ETFs were a record $60.8bn this year, three times as much as last year, with the bulk of assets going into fixed income prefects as the region’s growth outlook weakened and there was expectation of an expansion of the European Central Banks’s bond purchase program. “What’s more, we saw increased adoption of Europe-listed funds all over the world,” she added.

As the interest in Europe-listed ETFs has grown, US issuers. In addition to WisdomTree buying Boost, McNeil said First Trust also recently established a European business.

Last month WisdomTree launched its first European listed ETFs with a range of six physically backed Dublin domiciled UCITS ETFs based on dividend weighted US, Europe and emerging markets large cap and small cap indices.

“For most of the products there are existing US versions with up to eight years track record and billions of US dollars already invested in them,” added McNeil. “We thought it was very important to bring products with strong track records as our first launch.”

McNeil said assets under management at Boost reached a record $172m by December 1 2014, up from $37m at the end of November last year and trading volumes reached a record $388m in November, compared to $25m a year ago.

“2015 and beyond will see the European ETP market continue to grow rapidly, change in structure and see increasing innovation. While safe to say the US is still leading the way, Europe is learning and catching up fast!” said McNeil.

Featured image via iStock

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