What’s Working In Smart Beta ETFs

April 05, 2019

Not too long ago, smart-beta ETFs were the focus of all the hype in an industry fascinated with the new and novel ways ETF issuers were slicing and dicing the market.

A little less long ago, some naysayers started to say smart beta had had its day, as investors returned their attention to cheap, easy-to-understand and easy-to-implement core beta strategies. No bells and whistles required.  

In reality, as a segment, smart-beta ETFs find themselves somewhere in the middle—neither the hottest new thing in town, nor obsolete and forgotten.

From the get-go, complexity and, traditionally, a higher price tag, have been head winds for adoption of these strategies. This is still true today, especially in an ETF market where fee compression is inching closer and closer to zero.

New Launches, Outsized Growth

But smart-beta ETFs keep on coming, and some keep on growing at an impressive rate. In the past 12 months (as of late February), 77 new smart-beta ETFs came to market—or roughly a third of all ETFs launched in the past year, according to FactSet data. There are more than 1,000 smart-beta ETFs on the market today.

What’s more, asset growth in this segment outpaced the broader ETF market as well as vanilla ETF asset growth on a percentage basis in the past year. While vanilla funds saw total assets under management (AUM) grow 4.3% in the time period, smart-beta fund assets grew 10.9%, according to FactSet data. Today smart-beta ETFs command $880 billion in total combined assets.  

“The past 12 months have been good for ‘smart beta,’ in contrast to its below-market growth rate in 2016 and 2017,” FactSet's Director of ETF Research Elisabeth Kashner said. “SPY was the elephant in the room, losing over $20 billion in outflows during the period, thereby lowering the growth rates for vanilla funds. Massive liquidity cuts both ways.” 

Factors Working In Space

The biggest smart-beta ETF in the market today is the Vanguard Value ETF (VTV), with $47 billion in total AUM.

As a factor, value has been a “winner” in recent months, Kashner says, and VTV has dominated that corner of the market. Not only is this fund huge, it keeps growing. In 12 months, VTV grew from a $37 billion ETF to a $46 billion fund.



“Of the specific strategies that started the time period with $10 billion or more in AUM, winners were value, multifactor, fundamental and low volatility,” Kashner added.

After a dip late in 2018, VTV is now up 11.7% so far in 2019.

Other Winning Factors

Another segment that has been resonating with investors in the past year is low volatility, and no ETF comes even close to the iShares Edge MSCI Min Vol U.S.A. ETF (USMV) in this space.

The fund has been hugely popular with investors in the past year, attracting flows of $8 billion in 12 months, and today boasts more than $25 billion in total AUM. USMV is today the largest-largest smart-beta ETF on the market. By comparison, close competitor Invesco S&P 500 Low Volatility ETF (SPLV) saw $2 billion in net asset inflows in the same March-March period, and today has $10.1 billion in total assets.

USMV is up about 12% year-to-date, and has rallied almost 13% in the past 12 months.  


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