Big names are biggest winners as smart-beta ETFs soar

The segment has gained popularity as investors seek market-beating returns that cost less

Big names are biggest winners as smart-beta ETFs soar
BlackRock and Vanguard have once again bolstered their position as the world’s two largest ETF providers as they benefit from one ETF segment’s growth.

According to data from Morningstar, the two firms are the only asset managers globally that have more than US$100 billion in smart-beta products. That makes them the big winners in the worldwide growth of such strategies in recent years, reported the Financial Times.

“It will be exceedingly difficult for anyone to catch up,” Ben Johnson, director of global ETF research at Morningstar, told the publication. “The lead they have could shrink a bit, but I don’t think anyone can overtake them.”

Smart-beta ETFs are seen by many as a hybrid of active and passive management. Typically created by altering a standard index fund’s weighting rubric, they aim to provide market-beating returns that don’t cost as much as active management.

“There are a whole class of investors who are to some degree disillusioned with active management, but not so disillusioned that they are willing to simply own the market,” Johnson said.

The fastest-growing of the 10 largest smart-beta managers over the past five years, according to Morningstar, has been ALPS; since 2012, its AUM has exploded by more than 4,000% to reach approximately $6 billion.

The slowest-growing managers, on the other hand, have been Invesco PowerShares and State Street Global Advisors, rising by 87% to nearly US$50 billion and 118% to some US$40 billion, respectively. Johnson attributed their lagging progress to slow adoption of smart-beta strategies.

“Our experience is that uptake of a smart-beta product varies according to investor appetite for more complex and esoteric approaches,” said Rory Tobin, global co-head of SSGA’s SPDR ETF arm.

Meanwhile, Invesco’s Head of Global Exchange Traded Funds Dan Draper said its recent acquisition of rival ETF firm source, as well as a previously announced takeover of Guggenheim Investments’ ETF arm, will provide a range of smart-beta ETFs.

Industry experts have offered different outlooks on the current rush into smart-beta ETFs. “We are seeing an explosion of products,” said Jon­a­than de St Paer, head of product strategy and development at Charles Schwab. “I would be really surprised if some of these are around in the next few years.”

But Ryan Issakainen, ETF strategist at First Trust, had a different view. “Most investors may have heard a bit here or there, but they are just becoming familiar with how to use smart-beta funds in portfolios … so there is plenty of room for growth.”

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