Smart Beta ETFs Will Attract $100B In Inflows
For the past three years, “smart beta” ETF strategies have commanded plenty of attention in the financial service industry. Since 2013, more than $150 billion in new assets have flowed into these funds. But for 2016, we expect flows to grow at their fastest annual rate to date.
Several elements are lining up for smart-beta ETFs—which are considered to be any fund that is not market-cap-weighted—to attract potentially as much as $100 billion in new assets in 2016.
First, smart-beta ETF will continue to be a go-to tool for advisors. According to the latest ETF.com/BBH survey of financial advisors, 99% of all respondents said that they would maintain or increase their exposure to smart-beta ETFs in 2016. Clearly the demand is there.
Secondly, smart-beta strategies are now migrating more quickly from equity funds to all corners of the ETF universe. Smart-beta strategies have already been established in the fixed-income space, albeit at a much lower profile than with equities. Smart beta is also landing in emerging markets. Investors, who are now quite comfortable with the emerging market space, will begin moving away from broad-based investing models as EM growth continues to show a lot of cracks. There are even new “smart-beta commodity ETFs” coming in 2016.
And then there are major financial service companies like Goldman Sachs, J.P. Morgan and John Hancock entering the ETF space for the first time, and their initial launches are on based multifactor strategies. This last element could be the most important to fuel more smart-beta growth. The firms are bringing with them strong client bases and distribution platforms.
“We agree we will see continued growth for this investment theme,” said Todd Rosenbluth, director of ETF Research for S&P Capital IQ and SNL, adding that the other key driver of growth is how issuers are moving from single-factor to multifactor strategies as Goldman Sachs and John Hancock have done. That, however, will not make an advisor’s or investor’s job any easier.
“When you add multiple factors, it may very well end up being a very good product, and we think many of these will be. What’s inside it is not as easy to understand as with a single factor,” he noted. “You’re going to see quite different products, and you need to understand what’s in the product today, as well as in the past.”
