Who's Really Using Smart Beta Funds

Looking at 13F filings for ownership provides a glimpse into varying concentration of ownership.

Reviewed by: Lara Crigger
Edited by: Lara Crigger

[This article appears in our May issue of ETF Report.]

There's no doubt that smart beta has captured investors' hearts and minds. Last year, smart-beta ETFs accrued an astounding $52 billion in fresh net assets—or roughly 30% of all inflows into U.S. ETFs, according to FactSet. And in a recent ETF.com/BBH survey of financial advisors, 99% said they planned to maintain or increase their smart-beta ETF exposure in 2016.

But when it comes to asset flows, sometimes popularity can be an illusion. So we decided to take a closer look at who's using smart-beta funds—and why.

Methodology Here

We compared ownership of the largest smart-beta funds (by assets under management) for several market sectors, including broad-based U.S. equity, international equity and U.S. sectors, as well as smart-beta fixed-income ETFs.

Ownership was aggregated from quarterly 13F filings, which the SEC requires of any investment manager holding more than $100 million in assets. These may include pensions, banks, RIAs, wealth managers, broker-dealers and insurers. Generally, however, they don't include individual investors or smaller advisories.

In each segment, we concentrated on the largest funds, so as to minimize the impact newness or that illiquidity might have on the results; after all, it's common to see smaller and/or newer funds owned primarily by one or two big names.

All the funds examined have accrued significant assets, from $195 million up to $29 billion. Furthermore, all but one fund have average daily volumes in excess of $1 million and have traded for three or more years.

The Most Broadly Popular

Due to first-mover advantage, one might expect broad-based equity smart-beta ETFs to be popular with the widest set of investors. The numbers do indeed bear that out.

Consider the three largest smart-beta U.S. equity funds: the iShares Russell 1000 Growth ETF (IWF | A-91), the iShares Russell 1000 Value ETF (IWD A-89) and the Vanguard Growth ETF (VUG | A-92):

IWF = $28.92 Bn in AUM

Name% Ownership
Strategic Advisers, Inc.5.0
Managed Account Advisors LLC4.1
Merrill Lynch, Pierce, Fenner & Smith, Inc.4.0
Bank of America, NA (Private Banking)3.9
Morgan Stanley Smith Barney LLC3.0
Edward D. Jones & Co. LP (Investment Management)2.7
Goldman Sachs & Co. (Private Banking)2.5
Raymond James & Associates, Inc. (Invt Mgmt)2.0
UBS Financial Services, Inc.2.0
LPL Financial LLC1.8
Total number of filers709
Total percent ownership66.20%

IWD = $25.52 Bn in AUM

Name% Ownership
Edelman Financial Services LLC6.7
Strategic Advisers, Inc.5.9
Edward D. Jones & Co. LP (Investment Management)4.4
Managed Account Advisors LLC3.9
Merrill Lynch, Pierce, Fenner & Smith, Inc.3.6
Goldman Sachs & Co. (Private Banking)2.6
Morgan Stanley Smith Barney LLC2.2
Raymond James & Associates, Inc. (Invt Mgmt)2.1
Bank of America, NA (Private Banking)2
American Century Investment Management, Inc.1.9
Total number of filers605
Total percent ownership69.10%

VUG = $19.96 Bn in AUM

Name% Ownership
Managed Account Advisors LLC10
Merrill Lynch, Pierce, Fenner & Smith, Inc.6.5
Edelman Financial Services LLC5.5
Edward D. Jones & Co. LP (Investment Management)4.5
UBS Financial Services, Inc.3.5
Morgan Stanley Smith Barney LLC3.3
Strategic Advisers, Inc.2.5
Amerivest Investment Management LLC2.4
Envestnet Asset Management, Inc.2.2
LPL Financial LLC1.5
Total number of filers445
Total percent ownership63.40%

Ownership in these funds is well-distributed across large firms. With the exception of VUG, the top 10 investors in each ETF account hold percentages in the single digits. Plus, though hundreds of large money managers invest in each fund, they only represent two-thirds of total ownership. The remaining stake is held by smaller investors who don't have to file 13Fs.

Even VUG—the most concentrated fund, with 16.5% being held by either Merrill Lynch's Managed Account Advisors or Merrill Lynch directly—is fairly well distributed across its investor base.

A similar picture emerges for the three largest smart-beta international equity funds: the WisdomTree Europe Hedged Equity ETF (HEDJ | B-47), the WisdomTree Japan Hedged Equity ETF (DXJ | B-66) and the iShares MSCI EAFE Minimum Volatility ETF (EFAV | A-70):

HEDJ = $14.76B in AUM

Name% Ownership
Morgan Stanley Smith Barney LLC4.8
UBS Financial Services, Inc.4.8
Managed Account Advisors LLC4.3
Goldman Sachs & Co. (Private Banking)4.2
Merrill Lynch, Pierce, Fenner & Smith, Inc.4.1
Bank of America, NA (Private Banking)3.7
Bessemer Investment Management LLC3.4
RiverFront Investment Group LLC2.3
Strategic Advisers, Inc.1.9
AFP Integra SA (Investment Management)1.9
Total number of filers443
Total percent ownership63.20%

DXJ = $10.85 Bn In AUM

Name% Ownership
Morgan Stanley Smith Barney LLC6.8
JPMorgan Investment Management, Inc.5.2
Merrill Lynch, Pierce, Fenner & Smith, Inc.5.1
Goldman Sachs & Co. (Private Banking)4.6
Bank of America, NA (Private Banking)3.8
Managed Account Advisors LLC3.3
Windhaven Investment Management, Inc.2.9
Bessemer Investment Management LLC2.8
UBS Financial Services, Inc.2.3
SSgA Funds Management, Inc.1.9
Total number of filers440
Total percent ownership76.40%

EFAV = $5.57B in AUM

Name% Ownership
BlackRock Fund Advisors5.4
Bank of America, NA (Private Banking)4.6
Morgan Stanley Smith Barney LLC2.9
BlackRock Asset Management Canada Ltd.2.8
Merrill Lynch, Pierce, Fenner & Smith, Inc.2.5
Wells Fargo Advisors LLC2.2
UBS Financial Services, Inc.2.1
LPL Financial LLC1.9
Sage Advisory Services Ltd. Co.1.9
Columbia Management Investment Advisers LLC1.7
Total number of filers216
Total percent ownership52.60%

Again, the 10 largest investors hold only single-digit percentages of each fund. And hundreds of 13F filers invest in each fund, though a significant ownership stake—from just under half for EFAV to one-quarter for DXJ—is held by smaller investors.

It only makes sense that this space would be so well-colonized. Smart beta first evolved to slice and dice large-cap equities, and that's where most investor and media attention remains. The ownership picture gets cloudier outside this familiar ground, however.

Fewer Investors In Smart-Beta Sector ETFs

We also examined the five-largest smart-beta U.S. sector ETFs (as classified by ETF.com's ETF Finder), which included:

AMLP = $7.00 Bn in AUM

Name% Ownership
Morgan Stanley Smith Barney LLC4.5
Wells Fargo Advisors LLC3.7
Merrill Lynch, Pierce, Fenner & Smith, Inc.2.8
UBS Financial Services, Inc.2.8
Citigroup Global Markets, Inc. (Broker)2.6
Goldman Sachs & Co. (Private Banking)2.4
RBC Capital Markets LLC1.9
ThomasPartners, Inc.1.9
QS Investors LLC1.3
Managed Account Advisors LLC1.2
Total number of filers491
Total percent ownership45.20%

ICF = $3.54 Bn in AUM

Name% Ownership
BlackRock Fund Advisors21.9
JPMorgan Chase Bank, NA (Investment Management)6.5
Bank of America, NA (Private Banking)4.5
Merrill Lynch, Pierce, Fenner & Smith, Inc.1.9
PNC Bank, NA (Investment Management)1.6
Morgan Stanley Smith Barney LLC1.6
Wells Fargo Advisors LLC1.5
ClearArc Capital, Inc.1.4
Creative Planning, Inc.1.4
LPL Financial LLC1.3
Total number of filers297
Total percent ownership64.60%

AMJ = $3.15 Bn in AUM

Name% Ownership
MLP Investment Holdings, Inc.8.3
AT Investment Advisers, Inc.3.1
Eagle Global Advisors LLC2.7
Morgan Stanley Smith Barney LLC2.5
Miller/Howard Investments, Inc.2.1
Wells Fargo Bank, NA (Private Banking)2.1
The Dow Chemical Co. Pension Fund1.7
Fund Evaluation Group LLC1.5
The Haverford Trust Co.1.2
Susquehanna Financial Group LLLP1.1
Total number of filers321
Total percent ownership57.10%

FXG = $2.43 Bn in AUM

Name% Ownership
First Trust Advisors LP36.4
Morgan Stanley Smith Barney LLC13.1
Wells Fargo Advisors LLC10.4
UBS Financial Services, Inc.4
Merrill Lynch, Pierce, Fenner & Smith, Inc.3.8
LPL Financial LLC2.6
Raymond James & Associates, Inc. (Invt Mgmt)2.4
Columbia Management Investment Advisers LLC1.7
Raymond James Financial Services Advisors, Inc.1.6
MetLife Securities, Inc.1.3
Total number of filers160
Total percent ownership96.50%

FXH = $2.41 Bn in AUM

Name% Ownership
First Trust Advisors LP34.7
Morgan Stanley Smith Barney LLC14.4
Wells Fargo Advisors LLC9.6
Merrill Lynch, Pierce, Fenner & Smith, Inc.4.3
LPL Financial LLC4
UBS Financial Services, Inc.3.4
Raymond James & Associates, Inc. (Invt Mgmt)2.2
Raymond James Financial Services Advisors, Inc.1.4
RBC Capital Markets LLC1.2
Columbia Management Investment Advisers LLC1.1
Total number of filers170
Total percent ownership93.90%

Interestingly, for three of these funds, ownership is dominated by the wealth management arms of the funds' sponsors: BlackRock Fund Advisors, in the case of ICF; and First Trust Advisors, in the case of FXG and FXH.

For the First Trust funds, it's especially striking, because 13F filer ownership represents the vast majority of investment. It accounts for 97% and 94% of FXG and FXH, respectively.

Extreme Concentration

Smart-beta bond ETFs remain a much smaller space than their equities counterparts; as of November 2015, only 31 funds had launched, amassing just $4.5 billion in assets total.

Some smart-beta bond ETFs, however, have managed to take off. The five largest include:

TDTT = $1.82 Bn in AUM

Name% Ownership
Northern Trust Investments, Inc.82.0
ValMark Advisers, Inc.12.9
TD Ameritrade Trust Co.0.9
Hills Bank & Trust Co. (Investment Management)0.8
Nicolet Bankshares, Inc. (Private Banking)0.3
FirstMerit Bank, NA (Investment Management)0.2
Merrill Lynch, Pierce, Fenner & Smith, Inc.0.1
Envestnet Asset Management, Inc.0.1
Comerica Bank (Investment Management)0.1
VSR Financial Services, Inc.0.1
Total number of filers52
Total percent ownership98.70%

PHB = $688 Mn in AUM

Name% Ownership
Wells Fargo Advisors LLC12.3
Invesco Canada Ltd.9.6
Lazard Asset Management LLC4.3
Morningstar Investment Services, Inc.2.8
UBS Asset Management (Americas) Inc.2.8
LPL Financial LLC2.7
SunTrust Banks, Inc. (Wealth Management)2.4
Envestnet Asset Management, Inc.2.1
Aft, Forsyth & Sober LLC1.9
UBS Financial Services, Inc.1.8
Total number of filers124
Total percent ownership62.80%

TDTF= $472 Mn in AUM

Name% Ownership
Northern Trust Investments, Inc.45.5
Charles Schwab Investment Advisory, Inc.40.6
Lourd Capital LLC7
Evensky & Katz LLC3.4
Merrill Lynch, Pierce, Fenner & Smith, Inc.0.6
Sanders Morris Harris LLC (Investment Adviser)0.5
LPL Financial LLC0.4
Wells Fargo Advisors LLC0.4
RBC Dominion Securities, Inc.0.3
Morgan Stanley Smith Barney LLC0.1
Total number of filers27
Total percent ownership98.90%

VBND = $406 Mn in AUM

Name% Ownership
Ronald Blue & Co. LLC95.9
KCG Americas LLC0.8
Litman Gregory Asset Management LLC0.5
Susquehanna Financial Group LLLP0.4
Jane Street Capital LLC0.3
RBC Dominion Securities, Inc.0.3
Tower Research Capital LLC0
Total number of filers7
Total percent ownership98.30%

SPFF = $195 Mn in AUM

Name% Ownership
Aviance Capital Management LLC16.2
Janney Capital Management LLC3.7
Gradient Investments LLC2
LPL Financial LLC1.6
Morgan Stanley Smith Barney LLC1.4
Envestnet Asset Management, Inc.1.1
RJL Capital Management LLC1
Janney Montgomery Scott LLC (Investment Management)0.6
Partnervest Advisory Services LLC0.6
EQIS Capital Management, Inc.0.5
Total number of filers48
Total percent ownership31.70%

Ownership of two of the five funds—PHB and SPFF—appears fairly well-distributed across the investor base. The other three ETFs, however, demonstrate dramatically concentrated ownership.

The market's largest smart-beta bond ETF, FlexShares' TDTT, is owned 82% by Northern Trust, which is the fund's index provider and manager. FlexShares' TDTF is dually dominated by Northern Trust and Charles Schwab, accounting for a 46% and 41% share, respectively. What's more, large firms apparently account for 99% of the ownership of both these funds.

The most egregious ownership concentration, however, is in VBND, which is 96% owned by Ronald Blue & Co. Just seven 13F filings represent a whopping 98% of the ETF's ownership.

Who Owns What … And Why?

The data reveal that ownership for several smart-beta funds in narrower equity sectors or in fixed income is concentrated, sometimes extremely so.

If we define "concentrated ownership" as a 20% or more stake by one party, then the funds showing concentrated ownership include:

  • ICF, iShares's REIT fund (22% owned by BlackRock)
  • FXG, First Trust's consumer staples ETF (36% owned by First Trust Advisors)
  • FXH, First Trust's health care fund (35% owned by First Trust Advisors)
  • TDTT, FlexShares' 3-year TIPS fund (82% owned by Northern Trust Investments)
  • TDTF, FlexShares' 5-year TIPS fund (46% owned by Northern Trust Investments, 41% owned by Charles Schwab)
  • VBND, Vident's broad market bond ETF (96% owned by Ronald Blue & Co)

Just who are these companies? iShares, of course, is BlackRock's ETF arm. First Trust Advisors is an affiliate of First Trust Portfolios, which sponsors the AlphaDex ETFs. And Northern Trust Investments indexes and manages the FlexShares ETFs. Essentially, all three are firms with great incentive to ensure their funds' success.

VBND is a horse of a different color, however. As we reported back in 2014, VBND is a bespoke product Vident created especially for Ronald Blue & Co., an $8 billion Atlanta RIA, as a response to Bill Gross leaving PIMCO.


It's clear that some smart-beta funds have wide investors appeal, while others, not so much. Despite significant assets, funds like TDTT, TDTF, FXG and FXH aren't drawing the wide swaths of institutions, advisors or small investors needed to survive. Instead, these funds appear to be propped up, to varying degrees, by their own managers.

Why? The answer may be as simple as relevancy. Smart-beta funds are an excellent, on-trend way for issuers to keep their names in front of investors, especially in untapped areas such as fixed income or hot stock sectors. But funds take time to catch on with investors; in the meantime, providers will do what they can to keep their funds afloat.

Also possible: Firms like Northern Trust and First Trust—with their strong distribution platforms and significant client bases—are acting as agents for other investors, meaning they're using the ETFs for their own clients, much as Ronald Blue uses VBND for theirs, just on a larger scale.

We don't know for sure: Northern Trust declined to comment on this story, and First Trust did not reply to requests for comment in time for publication.

Ultimately, however, only time will tell whether these funds can attract a wider range of investors.

Lara Crigger is a former staff writer for etf.com and ETF Report.