Starting From Scratch In ETFs

August 28, 2017

[This article appears in our September 2017 issue of ETF Report.]

Active managers want a piece of the massive inflows into the ETF industry, especially since flows to mutual funds and other actively managed accounts continue to dwindle.

And they’re using smart beta to secure a toehold in the industry. Although the style may be called “smart beta,” the active manager strategies vary, and they’re promoting their approaches as a way to stand out.

Institutional Quality
Firms like Goldman Sachs Asset Management (GSAM) and J.P. Morgan designed their ETFs using the same propriety research that goes into their institutional products. Jillian DelSignore, head of ETF distribution for J.P. Morgan, says their ETFs “democratize” access to investments like hedge fund strategies, making it available to all types of investors.

J.P. Morgan’s ETFs were developed based on research by Yazann Romahi, chief investment officer of beta strategies at the firm.

“The Diversified Return Equity ETFs are multifactor plus—meaning we’re not only doing factor-based investing, but diversifying risk at the sector and regional level,” she said, noting the funds’ total assets under management (AUM) just surpassed $2 billion.

Others are applying in-house active management strategies with an ETF wrapper. Patrick O’Connor, global head of ETFs at Franklin Templeton, said it’s using a multifactor approach, but use 50% quality and 30% value, with 10% each on momentum and low volatility. Most multifactor ETF issuers equal-weight the exposure to the different factors.

It’s how they would pick stocks as active managers, O’Connor said: “We just systematized it in our multifactor products. They are no weighting schemes like that in the U.S. or anywhere.”

Franklin’s multifactor Liberty Shares ETFs just celebrated a one-year anniversary, although its first ETF was the Franklin Liberty Short Duration U.S. Government ETF (FTSD), which launched in 2013. Its AUM is now almost $800 million.

Paul Kim, managing director, ETF strategy at Principal Global Investors, whose firm launched its ETFs in 2015 and has $1 billion in AUM, says it takes “very much a practitioner’s perspective” on smart beta.

“We don’t take off-the-shelf indices; we’re not doing simple rules such as equal weights. We’re basically looking at factors that we would look at from a fundamental research perspective and trying to put them into indices,” he said.


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