Smart beta continues to gain traction among financial advisers.
Two reports this week show that the overall universe of strategies that tweak traditional market-capitalization-weighted indexing is becoming a larger part of investment portfolios and making particular inroads with independent financial advisers.
Morningstar Inc., which refers to the category as strategic beta, reported Wednesday that the total number of exchange-traded products has grown to 844, from 673 a year ago. Assets invested in those products reached $497 billion from $396 billion over the same period.
“The strategic beta landscape is
growing faster than both the broader exchange-traded products market as well as the global asset management industry, driven by new inflows, new product launches and the entrance of new providers during the past year,” said Ben Johnson, Morningstar's director of global ETF research.
The Morningstar report follows a
report released Monday by FTSE Russell that shows financial advisers as a leading force in the growth of smart beta strategies.
IN CLIENT PORTFOLIOS
According to the index provider's research, 68% of advisers who use ETFs are already incorporating smart beta products into their clients' portfolios.
In terms of the profile of advisers using smart beta strategies, the Russell report found them to be younger and with a higher share of assets in ETFs and alternative investments.
Advisers using smart beta products are also more likely to have practices that extend beyond the core activities of investment selection, asset allocation and
financial planning, according to the report.
The Russell research divides the smart-beta universe into two broad categories of strategies: those that go beyond market-cap weighting and those that use factor-based strategies looking at, for example, specific valuation ratios such as price-to-book or price-to-earnings.
“Factor-based and alternatively weighted indexes have transformed the investment landscape,” said Rolf Agather, managing director of North American Research for FTSE Russell.
“It is clear that advisers are embracing investment products based on these indexes as a way of incorporating new ideas into their clients' portfolios,” he added. “Our findings indicate that financial advisers view smart beta as an important portfolio tool for addressing investment challenges.”
FUZZY CONCEPT
For many financial advisers, the general notion of smart beta has remained a fuzzy concept, which can largely be attributed to an
asset management industry that keeps pumping out products without conceding much in the way of uniformity.
While Morningstar is making an effort to try and corral the various strategies into a single universe, the fund-tracking firm is also adding to the confusion by opting for the term strategic beta over the more popular smart beta.
Of course, Morningstar isn't the only contributor to the
nomenclature maze, which includes such descriptions as alternative beta, fundamental indexing, enhanced indexing and “quantamental” indexing.
FTSE Russell's research found that some of the vagueness around the space has led some advisers unwittingly into the strategies.
When asked what motivates them to use smart beta strategies, advisers said they were mostly looking for downside protection, low volatility, increased alpha and high yield. In that order.
But in practice, the research found that the most popular strategies used by advisers included
dividend income, high quality, fundamental and low volatility. In that order.
“One possible reason for the disparity is advisers are looking to protect their clients, but their clients may be demanding more yield and higher quality,” said Tom Goodwin, senior research director at FTSE Russell.
He acknowledged that “more education is needed,” but said a good place to start when searching for and evaluating a smart beta strategy is to look for “the support of good academic research and a good story behind the strategy.”
Mr. Goodwin added that the evolution of smart beta is being assisted by technology that makes it much easier to carve out specific and nuanced strategies that target various investment objectives.
GOOD EXPOSURE
“The technology has gotten to the point where you can take factors and put together a good exposure to these factors in an index form,” he said.
Mr. Johnson of Morningstar concurred that education will be increasingly important as the space continues to grow and evolve.
“As strategic beta strategies continue to proliferate and become increasingly nuanced, investors' due-diligence burden is growing commensurately,” he said.
