The End Of Smart Beta As We Know It

It’s too early to call the peak of this fad, but ETF providers will have to become a lot “smarter” about new product launches

Editor, Europe
Reviewed by: Rachael Revesz
Edited by: Rachael Revesz


Smart beta – the buzzword of the industry, lighting up the eyes of every asset manager in the passive fund universe – a term that still sets mouths chattering with its aim to deliver risk-adjusted outperformance over market-cap weighted returns. A concept that promises to make people rich.

Has Its Heyday Already Peaked?

The startling news of the first smart beta ETFs to shut up shop, from U.S.-based provider Market Vectors, may take readers by surprise. Its first four smart beta ETFs were launched in early 2014 and tracked MSCI factor indexes – international quality, international quality dividend, emerging markets quality and emerging markets dividend – but only gathered around $18 million in assets under management (AUM) between them.

The bad news continues. According to Lyxor, investors poured out of smart beta ETFs last month. A total of €74 million were redeemed from European-domiciled smart beta ETFs in August, the first net outflows recorded in a 12-month period.

Of course, August was difficult for most investors – the volatility index (VIX) jumped to a whopping 40 points on 24 August – and it was not only smart beta in Europe that suffered: investors piled out of emerging markets, precious metals and commodities and high yield bonds. Having said that, inflows in Europe were strong into developed market equities and fixed income overall. In fact, data from research house ETFGI showed that Europe-listed ETF inflows in August were the third highest on record.

So what does that tell us about how investors perceive smart beta? They are marketed as funds that outperform in different market cycles, and as funds that aim to deliver superior returns over their market-cap weighted counterparts, offering a generally more sophisticated exposure than plain old vanilla. (With market cap, if the FTSE 100 goes down, so do you.) Yet investors are piling out of smart beta, maybe viewing it as a more risky play than your average equity holding.

Perhaps the outflows are a reminder that smart beta is not always “smart” – i.e. it doesn’t always outperform, and timing does come into it.

Combining Factors

But could combining factors be the next big push? Marketing and sales teams will be eager to reassure investors that by packaging up several factors into one index, their ETF is more likely to perform well throughout all market cycles.

The monthly reports on smart beta performance from ERI Scientific Beta show that diversified factor indexes have generated higher returns than their market cap counterparts every month this year, and year-to-date as a whole. In August, the best performing index in their range was the SciBeta Developed Mid Cap Diversified Multi-Strategy index, with a relative return of 1.86 percent compared to the broad cap-weighted index.

We have already seen this trend take hold with multi-factor ETFs launched by Amundi and Morgan Stanley in partnership with EDHEC’s Scientific Beta. The Amundi Global Equity Allocation Scientific Smart Multi Beta A-EUR UCITS ETF (SMRT) has grown to a very healthy €423 million, and has year-to-date returns of 6.65 percent in euro terms. The Morgan Stanley Scientific Beta Global Equity Factors UCITS ETF (GEF) has fallen over 1 percent YTD in USD terms but has still grown to $116 million. Not too shabby, compared to Market Vector’s combined $18 million AUM.

And now heavyweight iShares has now stepped into the fray. Its new FactorSelect ETFs mix value, quality, momentum and size into one fund, with competitive price tags. And if the largest ETF provider in the world is interested, the rest of the market surely will be, too. Interestingly, iShares also uses MSCI indexes – hopefully they will gain assets and not suffer a humiliating defeat as with Market Vectors this week.

It is too soon to “call the top” of smart beta popularity. MSCI has $124 billion tracking its factor indexes and $41.2 billion of that is passively tracking minimum volatility indexes, its most popular strategy, as of March 2015, and those assets are unlikely to disappear anytime soon. But I would say the smart beta fad as we know it is definitely reaching its peak. Product providers are going to have to be a lot more “smart” when it comes to launching new ETFs – and perhaps realising that one-factor indexes have had their day in the sun.


Rachael Revesz joined in August 2013 as staff writer. Previously an investment reporter at Citywire, she has a background in writing content for retail financial advisors and has covered a wide range of subjects in finance. Revesz studied journalism at PMA Media, which has since merged with the Press Association. She also holds a B.A. in modern languages from Durham University, as well as CF1 and CF2 financial planning certificates from the CII.