Smart-beta ETFs take in billions in new assets

So far this year, such funds have garnered $37.6 billion in net new cash

Oct 11, 2017 @ 3:18 pm

By John Waggoner

Smart-beta ETFs, which combine the low costs of indexing with rules-based investing, continue to attract billions in new assets as the stock market climbs.

So far this year, smart-beta ETFs — called "strategic beta" by Morningstar Inc. — have seen $37.6 billion in net new cash. Morningstar's categorization is broad: It includes single-factor funds, such as Vanguard Value ETF (VTV), which has seen an estimated $4.3 billion in net new money this year alone. The 10 largest smart-beta funds have attracted $15.5 billion this year.

More complex smart-beta funds, which use multiple factors or invest in several asset classes, have also attracted plenty of new money. First Trust Nasdaq Bank ETF (FTXO), for example, has seen $1 billion in net new cash. The fund uses three price factors to pick the bank stocks.

FlexShares International Quality Dividend Index Fund (IQDF) has seen $362.7 million in net new cash over the past 12 months, according to Morningstar estimates. The fund uses a multifactor approach to choosing high-quality, dividend-paying stocks issued by overseas companies, aiming to reduce volatility and grow capital.

The trick to getting new ETF assets is keeping them. The 18 FlexShares multifactor ETFs tracked by Morningstar have seen estimated net inflows of $1.7 billion in the past 12 months.

Shundawn Thomas, who became president of Northern Trust Asset Management on Oct. 1, said the company has positioned the funds to appeal to institutional investors, such as advisers, as well as long-term individual investors.

"We don't have a lot of transactional investors by design," he said.

FlexShares considers its factor-based strategies to be factor investing, not smart beta/strategic beta.

Others haven't been quite as fortunate. First Trust Energy AlphaDEX ETF (FXN), which looks for gains in the oil patch, has shed an estimated $1.1 billion in net new cash this year for an obvious reason: The fund is down 12.3%. Smart beta or not, that's a bigger loss than the equity energy category overall.

Not surprisingly, some of the smart beta multifactor ETFs with the biggest inflows of net new cash have strikingly good performance figures. iShares Edge MSCI USA Momentum Factor ETF (MTUM), for example, has jumped 27.4% this year through September, and seen $1.6 billion in estimated net new cash.

And that's par for fund asset flows in a bull market. Multifactor smart beta funds that strive to reduce risk will generally produce lower returns than their more aggressive brethren, and can be a tougher cell vs., say, a red-meat technology fund. And that's where advisers come in.

"We've done really well with quality strategies," Mr. Thomas said. "There are certain risk factors that people point to and say, 'Show us the ability to provide benefits from risk-adjusted returns.' And you have to think about what securities are going to show superior returns in terms of earnings, the ability to generate cash flow, and management efficiency."

(More: Will new smart-beta strategies boost target-date funds' performance?)

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