Fund Management

Smart Beta Funds Revolution Rolls On

Tom Burroughes, Group Editor, 4 March 2019


Assets held in funds using this approach to investing drew in fresh inflows for the first month of this year, suggesting appetite remains robust.

Assets invested in what are called smart beta exchange-traded funds and products listed globally rose to $680 billion at the end of January this year, rising by 10.1 per cent from the end of 2018, with this investment approach showing few signs of slowing down. 

The term “smart beta” relates to decomposing drivers, or factors, which propel investment return – such as dividend yield, momentum, quality and size. Indexes can be created out of the specific factors which can then be tracked by ETFs and ETPs, giving investors, so the proponents claim, a cheap way to capture the qualities that push performance. Such investment ideas show how the index-tracking market has become more sophisticated, responding to client demand for more finely tuned sources of return.

There were 1,322 smart beta classified ETFs/ETPs, with 2,404 listings on 40 exchanges in 32 countries. Net inflows were $7.38 billion, according to ETFGI, a research organisation tracking the sector.

ETFs are typically open-ended, index-based funds, with active ETFs accounting for 1.1 per cent market share. ETPs, on the other hand, are similar to ETFs in the way they trade and settle but do not use an open-end fund structure. 

The “smart beta” phenomenon is to some extent a way for investors to efficiently and – hopefully – cheaply put certain strategies to work without the higher costs of actively rotating a portfolio by moving in and out of specific stocks. The rise of the index-tracking or “passive” funds market has come about due to increased regulation, clients dislike of fees and a rise in equities which has made active management less appealing. There are debates about how far the “passive” trend can go and whether it creates distortions and hampers shareholder activism.

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