Smart Beta In Fixed Income ETFs Slowly Takes Root

December 22, 2016

It’s not unusual to hear that fixed income is the next great frontier for smart-beta ETF product development. The stats would suggest there’s plenty of room for growth. They also show that finding success in this segment remains a challenge, even if innovation continues to break through.

Consider that we are ending 2016 with nearly 800 smart-beta ETFs on the market—or almost half of all U.S.-listed ETFs—but only 3% of them are fixed-income funds. That’s fewer than 25 strategies, with combined assets of less than $18 billion, according to our count.

Smart beta in fixed income typically means bypassing traditional market-value selection and weighting schemes for alternatives that seek to hone in on key drivers of bond performance, such as duration, rate and coupon.

Smart-Beta Opportunity In Bonds

Perhaps one of the biggest challenges for ETFs to succeed in this segment is tied to opportunity. Unlike in the equity space, smart-beta bond ETFs aren’t really displacing vanilla-type funds, but are more likely to displace actively managed ones. And in bonds, active management has a pretty good following. We’ve written about this before.

Liquidity constraints, transaction costs, spotty data for individual bonds and a lack of academic research are also all barriers in this segment, serving to discourage alternative weighting schemes in fixed-income ETFs.

There’s also the issue of performance. Outperforming a vanilla take on a market segment isn’t what smart beta sets out to do. But lack of outperformance for what’s often a higher price tag can be an issue preventing some of these funds from attracting investor interest.

Top 3 Smart-Beta Fixed-Income ETFs By Assets

A look at the top three smart-beta fixed-income ETFs shows that moving away from market-value selection and weighting doesn’t always equate with outsized gains.

Here are the top three ETFs at a glance:


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