Smart Beta ETFs Set Record

Shanny Basar

Assets invested in smart beta equity exchange-traded funds and products reached a record last year as BlackRock predicted that they will be a major driver of growth for the ETF market.

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.

Smart beta ETFs listed globally reached a new record of $497bn at the end of November 2016, according to data last week from independent research and consultancy firm ETFGI. The consultancy said in a report that in the first 11 months of last year assets in smart beta equity ETFs rose by 18.1% from 2015 resulting in a five-year compound annual growth rate of 30.6%.

Through to the end of November 2016, smart beta equity ETFs had net inflows of $47.13bn. BlackRock’s iShares gathered the largest smart beta equity in that time period, followed by Vanguard and then Charles Schwab Investment Management according to ETFGI.

BlackRock said in a statement that the global ETF industry had total net inflows of $375bn last year, surpassing 2015’s total of $348bn. In addition iShares had a record $140bn in new flows including a record $20bn of net inflows into smart beta ETFs.

“iShares was number one in smart beta market share globally (37%), led by $9bn of net inflows into minimum volatility ETFs and MSCI USA Minimum Volatility  with net inflows of $4.2bn,” said BlackRock.

Mark Wiedman, global head of iShares and index investments at BlackRock, said in a statement: ‘We believe we are still in the early stages of a historic shift to ETFs and indexing more broadly. We believe trillions of dollars will move over the next few years as institutional adoption of ETFs and the move to fee-based advice in the retail sector both gather momentum.”

In addition BlackRock predicted that smart beta, multifactor and single factor ETFs will be a major driver of growth, alongside minimum volatility strategies, and that smart beta innovation will also likely be seen within fixed income.

In August Nizam Hamid, head of strategy at exchange-traded issuer WisdomTree Europe, predicted that assets in smart beta ETFs will reach $1 trillion by the end of this decade. Hamid 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 in a statement. “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.”

Jonathan Chambers, analyst consultant at GreySpark Partners, said in a report last month that smart beta strategies are experiencing an increasingly high level of demand from investors.

“The higher relative management fees of active funds are becoming increasingly unattractive for the average investor, whereas companies such as BlackRock and Vanguard are trimming the fees of their passive funds, which is helping to improve their fee-adjusted returns,” added Chambers.

He continued that, as a result, active fund managers should evaluate the viability of their business models and increasingly look at whether using technology can offer value-add to their clients or assist in lowering the fees for investing within their funds to remain competitive.

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