Not that further validation was needed at least not after smart or strategic beta exchange-traded funds ended last year with $616 billion in assets under management, but more data suggest these funds will continue an already astounding growth trajectory.
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Smart Beta ETF Use On The Rise
In its third annual survey of institutional investors and their views on smart beta products, FTSE Russell found professional investors are expected to ratchet up their use of smart beta ETFs. FTSE Russell, one of the largest providers of indexes for use with ETFs, surveyed more than 250 money managers, a combined 80 percent of which manage $1 billion to $10 billion or more than $10 billion. Nearly half of institutional investors surveyed are in North America with a third hailing from Europe.
Importantly, and much to the chagrin to the often vocal critics of ETFs who do not adhere to traditional cap-weighting strategies, much of the new growth for smart beta ETFs is expected to come professional investors that previously have not embraced strategic beta.
The percentage of asset owners reporting that they are currently evaluating smart beta has doubled since 2014 and 2015 levels. This growth has come from asset owners who had not previously evaluated smart beta, as well as from asset owners who have evaluated smart beta in the past, but who choose not to implement, and who, we believe, are again evaluating smart beta, according to FTSE Russell.
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Knowledge About Smart Beta Is Likewise Increasing
As smart beta usage increases at the institutional level, the number of professionals saying they have not evaluated such strategies is declining in dramatic fashion. In FTSE Russell's 2014 survey, 40 percent of respondents said they had not considered smart beta. This year, that number is just 12 percent.
FTSE Russell's smart beta findings jibe with those of other data throughout the ETF industry. Earlier this month, BlackRock revealed data that show 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.
FTSE Russell data indicate smaller money managers are particularly keen to evaluate and use strategic beta offerings.
The strongest growth in smart beta adoption has come from asset owners with under $1 billion in AUM. In 2016, over one quarter of asset owners with under $1 billion in AUM have a smart beta allocation, up from 9 percent in 2014. The percentage of asset owners in this segment currently evaluating smart beta has steadily grown, from 12 percent in 2014, to 33 percent in 2016, according to the index provider.
Portfolio Allocations Reflect The Trends
Not surprisingly, portfolio allocations, on a percentage basis, to smart beta ETFs are increasing at a staggering pace.
Of all asset owners with a smart beta allocation, the share with over 20 percent of equity assets has grown notably: from 18 percent in 2014, to 20 percent in 2015, to 39 percent in 2016. The share with 0 percent to 5 percent invested has similarly decreased, from 40 percent in 2014 to 22 percent in 2016, said FTSE Russell.
A Few Names
Smart beta ETFs following FTSE Russell indexes include the O'Shares FTSE U.S. Quality Dividend ETF (OUSA), O'Shares FTSE Europe Quality Dividend ETF (OEUR) and the newly minted JPMorgan Diversified Return U.S. Mid Cap Equity ETF (NYSE: JPME).
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