Smart beta could give funds an entry into ETF market

More than 2,200 people met at the Inside ETFs conference in Hollywood, Fla., this week, and it was all about product — smart beta product, specifically.

The record attendance follows record flows to ETFs in 2016, with more than $280 billion in new money flooding into ETFs, smashing all previous annual records. And even as record amounts of money flooded into ETFs, more than $186 billion flew out of traditional mutual funds, creating a net one-year swing of $471 billion.

"ETFs are no longer the alternative investment choice," said Matt Hougan, CEO of Inside ETFs. "They are now the number one most recommended product by financial advisers, surpassing mutual funds, closed-end-funds, SMAs and cash. Since the financial crisis, they've brought in nearly $1.5 trillion in net new money, even as mutual funds have lost money. ETFs have won. Period."

For funds who delayed entry into the ETF market, smart beta is an appealing way to gain a toehold, participants said. “From a business perspective, smart beta is a good way for firms that are active managers to step into the ETF industry,” said Michael Iachini, head of manager research at Charles Schwab Investment Advisory. “Mutual funds are not growing. ETFs are growing.”

Conference programs aimed at advisers and providers alike, with topics ranging from “How to Launch An ETF — a step-by-step guide,” to “ETF exit strategies — a conversation with a leading ETF Investment Banker."

For some companies, the conference was a perfect time to introduce new ETFs. Victory Capital, for example, rolled out the VictoryShares ETF platform, which features its 11 existing ETFs, as well as six new ETFs that track indexes developed in partnership with Nasdaq.

For nearly all the attendees, rules and regulations were a topic of big concern. And, thanks to the new administration, those rules and regulations, particularly the Department of Labor fiduciary rules, were in doubt. “It's an interesting, cumbersome rule, and we're all looking forward to its delay,” said Dalia Blass, counsel, investment management practice, at Ropes & Gray.

DOL or no DOL, there's no getting away from the fiduciary standard, said Elizabeth Kashner, director of ETF Research at FactSet. “Dollars are marching in the direction of funds that put money into investors' pockets and less in advisers' pockets.”

The most interesting trend: The realization that as smart beta products get more complex and specialized, they start to look increasingly like actively managed funds. “Multi-factor funds are almost back to the active managers' black box,” said Michael Sapir, CEO of ProFunds Advisers. And, he notes, few multi-factor funds have five-year track records.

Other companies say that active managers provide good insights for new multi-factor funds. “Rather than create backtested funds, we look at what successful active managers have done that's unique,” said Marc Zeitoun, Head of Strategic Beta at Columbia Threadneedle. One interesting finding: ESG strategies often boosted performance.

“Introducing ESG as a factor decreased risk,” Mr. Zeitoun said. “Well-run companies tend to do well — they're diverse, they have a soul.”