Smart Beta ETF Adoption Slower Than Expected

February 01, 2017

Deborah Fuhr, managing partner of consultancy ETFGI, is widely respected in the ETF industry for her deep expertise and insight into all things ETF. In a recent sit-down with us, she offered her take on the current state of the ETF market, and what she sees happening ahead. What are some of the most important trends in the ETF market right now?

Debbie Fuhr: If we look at 2016, we had record levels of net new asset inflows globally and in the U.S. We’re at a global record of $3.5 trillion. We've seen 35 months of positive net new assets going into ETFs—that’s basically three years. I can't think of any other product over the past three years that would be able to say that.

We also saw a lot of new launches last year, but not a record year. We did, however, have a record year in the number of closures globally and in the U.S. Many firms are trying to decide what the right family of products to have is. And there’s been a lot of fee pressure.

Among the launches, there's been a lot in the smart-beta space. But what’s interesting is that smart beta has grown, but probably not at the rate people would’ve expected. The issue is that smart beta’s not really clear. The asset management industry doesn't speak about what smart beta is with a clear voice.

Some people think it's index, some think it's active. There's no agreement as to which factors are smart beta. About 33% of the assets in smart-beta products are sitting in dividend products—which, for most investors, is not smart beta at all, but an income play.

As we move to multifactor and even single factor, the challenge for many is, “how do I use this in my overall portfolio?” People should understand that factors are designed to deliver better-than-market-cap returns over very long periods of time. But you could have multiyears of underperformance. We have to be careful to be clear about what we’re really measuring here.

As an industry, many of the new firms looking at launching ETFs are thinking about whether they should have their own ETFs—what’s their strategy? They’re looking at digital and automated advice. They’re looking into whether to partner up with someone else, or whether to acquire. We’re going to continue to see entrants into the space take many forms.

From a regulation standpoint, my believe is the DoL [Dept. of Labor fiduciary] rule may be delayed, but it’ll increase the use of ETFs, because the compliance means that small accounts will likely be pushed to automated services as opposed to being covered. And the move toward providing products that are in the best interest of the investor and are reasonably priced will also be a positive towards ETFs.


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