The Continued Rise Of Smart Beta

April 28, 2015

[The following "ETF Issuer Perspective" is sponsored by Invesco PowerShares]


For the second year in a row, Market Strategies International, in collaboration with Invesco PowerShares, examined the growing trend in the utilization of smart-beta exchange-traded funds (ETFs) in the institutional market. The results of the latest study—The Evolution of Smart Beta ETFs—reveal that smart-beta ETFs have further penetrated the institutional market and are poised for additional growth moving forward.


Last year was a landmark year for ETFs. In 2014, investors added a record-high $240.4 billion to U.S.-listed ETFs. In addition, the industry has achieved record-high net inflows in each of the last three years, and there are now more than 1,450 U.S.-listed ETFs with a collective assets under management (AUM) of nearly $2 trillion.1 Standing on the success of this larger ETF evolution, smart-beta ETFs have shined in recent years and continue to gain momentum, particularly in the institutional market.


In the simplest terms, smart-beta ETFs follow indexes based on alternative weighting methodologies. Many of these alternative weighting methodologies (such as low volatility, high dividend and fundamentally weighted) have historically delivered favorable risk-adjusted returns and varying returns across different market regimes. As a result, institutions are increasingly looking to smart-beta ETFs as a complement to and a replacement for both their traditional market-cap-weighted ETFs and their actively managed positions.


A Widening Trend

Overall, smart-beta ETFs accounted for over 17% of U.S. ETF net inflows in 2014, despite representing less than 11% of the total assets. Today there are more than 350 smart-beta ETFs available in the U.S. comprising over $230 billion in AUM, up from just 212 products and $64.8 billion in 2010.1 Over the past year, institutional decision-makers—including public and private pensions, endowments and foundations, and registered investment advisors who manage institutional assets—have become more familiar with the smart-beta category.


Consequently, more than one-third of those currently using ETFs are now using smart-beta ETFs, up from 24% last year.


Following are key findings from this year's study:


  • 6 in 10 institutional decision-makers are now familiar with smart-beta ETFs, up from 54% last year
  • 1 in 3 institutional decision-makers indicate they are currently using smart-beta ETFs
  • Accessing specific factors and reducing costs remain the top reasons for using smart-beta ETFs
  • Among a variety of available smart-beta products, high-dividend funds are the most widely used
  • Lack of familiarity with smart-beta ETFs remains the No. 1 barrier to increased adoption
  • Nearly two-thirds of institutions indicate they are likely to increase their use of ETFs over the next three years
  • Over the next three years, institutions plan on increasing their use of smart-beta ETFs more than any other category (including market-cap-weighted ETFs)


Disproportionate Growth

When looking at the ETF category as a whole, institutional decision-makers have a wide range of options. Despite representing a low proportion of total ETF assets in the institutional market, smart-beta ETFs saw the highest year-over-year increase in institutional usage: from 24% in 2013 to 36% in 2014.


The momentum appears to be shifting toward smart-beta ETFs as the industry has introduced more nonmarket-cap-weighted funds. While the proportion of ETF assets invested in market-cap-weighted ETFs dropped from 75% to 68% from 2013 to 2014, the asset proportion invested in smart-beta ETFs increased from 7% to 13%.


Interestingly, usage of active ETFs (products that mimic traditional mutual fund strategies in an ETF structure) has remained flat year-over-year in the midst of a growing number of active ETF filings and increased Securities and Exchange Commission attention.




Beta is a measure of risk representing how a security is expected to respond to general market movements. Smart beta represents an alternative and selection-based methodology that seeks to outperform a benchmark or reduce portfolio risk, or both. Smart beta funds may underperform cap-weighted benchmarks and increase portfolio risk.


We'll dig further into the reasons for the growth and expected growth of smart-beta ETFs in subsequent articles.



1Bloomberg L.P., as of Dec. 31, 2014.



About The Study

The data contained within this analysis was collected from 253 participants between October 9 and December 4, 2014. A 15-minute online survey was administered by Market Strategies International, to institutional decision-makers, including pensions, endowments/foundations, nonprofit institutions, mutual funds, as well as RIAs who manage institutional assets. All institutions had at least $20 million in assets and allocated at least 1% of their assets to ETFs. Institutional RIAs had at least $25 million in assets under management—a portion of which was managed on behalf of institutional investors.


Survey participants' experience may not be representative of others, nor does it guarantee the future performance or success of any product. The opinions expressed are those of Market Strategies International and are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.


Invesco PowerShares is not affiliated with Market Strategies International. Market Strategies International is an independent full-service market research and consulting firm, specializing in wealth management. Market Strategies International was hired by Invesco PowerShares to conduct the research used in the creation of this study. Respondents were not made aware of Invesco PowerShares' involvement in this research initiative. Market Strategies International offered participants an honorarium for their participation.


There may be material differences in the investment goals, liquidity needs and investment horizons of individual and institutional investors.


Glossary & Terms

Beta: A measure of risk representing how a security is expected to respond to general market movements. For example, a beta of 1 means the security is expected to move with the market. A beta of less than 1 means the security is expected to be less volatile than the overall market. Betas greater than 1 are expected to exhibit more volatility or movement than the general market.


Dividends: Shows how much a company pays out each year to shareholders relative to its share price.


Market-Cap-Weighted: A type of index in which individual components are weighted according to market capitalization. Index value can be calculated by adding the market capitalizations of each index component and dividing that sum by the number of securities in the index.


Nonmarket-cap weighted: Assigns weights to stocks based on factors other than market capitalization in an attempt to reduce the risk of overexposure to a certain sector or group of stocks.


Smart Beta: An alternative and selection-index-based methodology that seeks to outperform a benchmark or reduce portfolio risk, or both, in both active and passive vehicles. Smart-beta funds may underperform cap-weighted benchmarks and increase portfolio risk.


Volatility: The annualized standard deviation of monthly index returns.


Risk Information

Opinions expressed are those of Market Strategies International, and are not necessarily those of Invesco PowerShares, Invesco Distributors, Inc. or Invesco Ltd. Invesco Ltd. and its subsidiaries offer no guarantees or warranties as to the accuracy and reliability of opinions expressed, and cannot guarantee similar experiences. Invesco PowerShares is not affiliated with Market Strategies International.


Reprinted with permission from Market Strategies International. The information in this report is for informational purposes only. It is not to be construed as investment advice or a recommendation of a particular strategy or product.


There are risks involved with investing in ETFs including possible loss of money. Index-based ETFs are not actively managed. Actively managed ETFs do not necessarily seek to replicate the performance of a specified index. Both index-based and actively managed ETFs are subject to risk similar to stocks, including those related to short-selling and margin maintenance. Ordinary brokerage commissions apply.


Investments focused in a particular industry are subject to greater risk, and are more greatly impacted by market volatility than more diversified investments.


There is no assurance that such ETFs will provide low volatility.


ETFs that pay high dividends as a group can fall out of favor with the market, causing such companies to underperform companies that do not pay high dividends.


Trademarks & Other Information:


PowerShares® is a registered trademark of Invesco PowerShares Capital Management LLC (Invesco PowerShares). Invesco PowerShares Capital Management LLC is an indirect, wholly owned subsidiary of Invesco Ltd.


Before investing, investors should carefully read the prospectus/summary prospectus and carefully consider the investment objectives, risks, charges and expenses. For this and more complete information about the Fund, call 800-983-0903 or visit for the prospectus/summary prospectus.



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