Expect the movement toward smart beta exchange-traded funds to continue in a big way. BlackRock, Inc. (BLK), the world's largest asset manager, has some estimates that could quell previously vocal critics of smart or strategic beta ETFs.
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BlackRock estimates that smart beta ETF assets will reach $1 trillion on a global basis by 2020 and then more than double to $2.4 trillion by 2025. The global ETF industry currently has north of $3 trillion in assets under management. Should BlackRock's estimates prove accurate, the growth of smart beta ETFs will be astounding.
Getting Smart With Smart Beta
With current smart beta ETF assets at $282 billion, this reflects an annual organic growth rate of 19 percent, double the growth rate of the overall ETF market. Minimum volatility and factor (multi and single) funds are expected to be key drivers of future growth and represent over 60 percent of new smart beta flows through 2025, said BlackRock in a statement.
BlackRock's estimates are the latest in a long line of data supporting the growth of smart beta ETFs. According to FTSE Russells first U.S. retail financial advisor market survey ("Smart Beta: 2015 survey findings from U.S. financial advisors") 68 percent of financial advisors polled are using smart beta ETFs and 70 percent are using multiple strategic beta approaches.
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A Few Names
Smart beta ETFs, particularly low volatility funds, are shining this year. For example, the iShares Edge MSCI Min Vol USA ETF (iShares Trust (USMV)) is this year's top asset-gathering equity-based ETF with $4.94 billion in new assets added. The PowerShares S&P 500 Low Volatility Portfolio (PowerShares Exchange-Traded Fund Trust II (SPLV)) and the PowerShares S&P 500 High Dividend Low Volatility Portfolio (PowerShares Exchange-Traded Fund Trust II (SPHD)) are the top two asset gathers for PowerShares with combined year-to-date inflows of almost $2 billion.
Smart beta ETFs have become increasingly popular strategies for investors seeking to manage risk and obtain precise exposure to historically return driving factors, and saw $31 billion in new flows globally in 2015. Minimum volatility ETFs were a major contributor in 2015 with over $11 billion of inflows, and have led the way in 2016 with a record-breaking $12.6 billion of inflows year-to-date, added BlackRock.
Smart beta ETFs are broadly defined as those funds that do not adhere to market capitalization weighting. Dividend, equal-weight and low volatility are among the most popular smart beta strategies.
New York-based BlackRock is the parent company of iShares, the world's largest ETF issuer.
Disclosure: Todd Shriber owns shares of SPHD.
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