What’s Working In Smart Beta ETFs

April 05, 2019

Multifactor Winners

On the multifactor front, two smaller ETFs have stood out in the past year with impressive growth: the Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF (GSLC) and the Hartford Multifactor Developed Markets (ex-US) ETF (RODM), Kashner notes.

GSLC grew nearly 65% in size, going from $2.9 billion in total AUM in March 2018 to $4.5 billion a year later. RODM, meanwhile, has seen sevenfold growth, hitting more than $1.8 billion in total AUM today—up from only $280 million 12 months ago.

Both of these ETFs have had a good run year-to-date, posting double-digit gains—although RODM remains down 2.5% on an annual basis.



Fundamental Winners

Finally, among fundamental ETFs, two funds deserve a closer look, each practically doubling in size in the past year, according to FactSet data. 

The iShares Edge MSCI U.S.A. Quality Factor ETF (QUAL) neared $10 billion in assets by March 2019—up from $4.5 billion a year earlier—while the iShares Core Dividend Growth ETF (DGRO) grew to $6.1 billion in total assets in 12 months.

Year-to-date, both strategies have delivered double-digit returns, with QUAL now up more than 17% in 2019, and DGRO up 12.7%. Like other equity strategies, these ETFs too faced a dip in late 2018.


Charts courtesy of StockCharts.com


What’s Working In Smart Beta

At the end of the day, beyond specific factors or pockets of smart-beta ETFs that resonate with investors at any given time, two key trends are driving smart-beta ETF asset growth.

The first has nothing to do with innovation, but everything to do with cost.  

“What caught my eye in this space [in the past year] was not inventiveness in repacking stocks, but the appeal of the cheapest funds,” Kashner said. “Strategic funds with expense ratios of 0.10% or less took in $34.5 billion; the 0.11-0.20% group took in $23 billion; 0.21-0.30% took in $17.3 billion; but only $2.8 billion went to funds charging more than 0.30%.” 

VTV, the biggest smart-beta ETF on the market today, has a price tag of 0.05%. Investors are paying $5 per $10,000 invested for this massive, hugely liquid smart-beta ETF that trades at pennywide spreads. VTV is not only cheap for smart beta, it’s cheap for an ETF in general. 

Costlier Funds Still Relatively Cheap

The iShares Russell 1000 Growth ETF (IWF) and the iShares Russell 1000 Value ETF (IWD) aren’t that far behind VTV, with $43 billion and $38 billion in total AUM, respectively. They cost significantly more, at 0.20% in expense ratio each, but that’s still less than most smart-beta strategies.

Rounding out the top five smart-beta funds in terms of size, the Vanguard Growth ETF (VUG) reached $37 billion in total AUM in the past year, while the Vanguard Dividend Appreciation ETF (VIG) is today the fifth-largest smart-beta ETF, with $33 billion in assets. VUG also costs only 0.05% and VIG costs 0.08%, or $8 per $10,000 invested.

Clearly iShares and Vanguard dominate the space in assets—much like they do in other asset classes and segments of the ETF market. Cost is no doubt a big part of it.

But keeping a lid on cost is also helping relatively younger, smaller players like Goldman Sachs find traction. Consider that GSLC, one of the smart-beta ETFs from Goldman’s ActiveBeta lineup that has found strong following, costs only 0.09%—or $9 per $10,000 invested.

The second thing to note is that smart-beta asset growth is also driven by a trend in the ETF space known as “bring your own assets,” Kashner says. Outside of iShares’ and Vanguard’s massive success in the space, and outside of ultra-low-cost strategies, newer issuers that are backing their proprietary ETFs with their own clients’ money have also found success in getting traction in the space. Note for example that Goldman is one of the top shareholders in GSLC.

If it’s indeed true that assets beget assets, BYOA is as smart a strategy to get a new smart-beta fund going in an ever-crowding segment as any other, and some issuers are finding it a winning strategy. 

Contact Cinthia Murphy at [email protected]

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