Asset owners and fund providers are paying significantly more attention to the space
Adoption of smart-beta funds around the world has advanced significantly within the past five years, according to a new survey from FTSE Russell.
The report said smart-beta adoption has reached a record high of 48%, with only 9% of respondents interviewed this year saying they have no allocation and have no plans to evaluate smart-beta strategies. The number of smart-beta products has also increased, as survey participants reporting increased off-the-shelf product availability has exploded from 8% in 2017 to 56% this year.
Looking deeper into adoption trends, FTSE Russell found the largest acceleration in adoption among asset owners with less than $1 billion in AUM, from 9% in 2014 to 39% in 2018. The surge was explained by the increase in faith among consultants, who generally dismissed smart beta as a fad five years ago but are mostly convinced of its usefulness today. Smart-beta adoption was also found to be higher in Europe, where disillusionment with active management and regulatory insistence on reducing costs in pension schemes are more pervasive.
The objectives behind smart-beta adoption have not changed much from the past. The top reasons were risk reduction and return enhancement, followed by improved diversification in third place. “There has been a notable trend in ‘cost savings’ as an investment objective, which is the fourth ranked objective,” FTSE Russell said.
Adoption of fundamentally weighted smart-beta products declined from 41% in 2014 to 19% in 2018; however, the report noted that ETFs based on fundamental weighting still make up the bulk of smart-beta products and the assets placed in these strategies have grown steadily. Meanwhile, multi-factor ETF adoption spiked from 20% in 2015 to 64% in 2017, though it dipped to 49% in 2018
Fixed-income smart beta products are still their infancy, with 61% of respondents saying they have no plans to evaluate these strategies. The number of those who’ve made allocations to fixed-income smart beta also barely ticked up from 7% to 9%.
In contrast, ESG ETFs grew dramatically in North America and Europe from 2016 (around US$3.8 billion and US$2.5 billion in North America and European Union, respectively) to May 2018 (some US$6.3 billion and US$8 billion, respectively).
“Two trends that have helped are, on the one hand, a movement within ESG investing away from exclusionary screens, and, on the other hand, the rise of factor investing within smart beta,” the report said. More strategies are tilting toward ESG scoring, which fits well with multi-factor funds’ methodology of tilting capitalization weights toward certain factor exposures.
Based on high reported satisfaction levels among smart-beta asset owners, which ranged from 51% to 74% over the last four years, FTSE Russell said it expects new growth to continue, particularly among multi-factor and multi-factor ESG strategies.