Advisors doubling down on smart-beta bets

But the bases for choosing smart-beta ETF providers differ

Advisors doubling down on smart-beta bets
Smart-beta funds have acquired a substantial following in recent years, and they may expect to see increased investment from existing unitholders.

A 740-advisor survey conducted by investment industry publication Ignites Research found that 259 (35%) use smart-beta ETFs in their clients’ portfolios, reported Financial Advisor IQ. Two thirds (67%) of those advisors who already use smart-beta ETFs put between 1% and 10% of their assets under management (AUM) in the instruments. Around a fourth (26%) have 11% to 20% in smart-beta ETFs, 6% have 21% to 40%, and 1% have 41% and above.

According to data from Morningstar, smart-beta ETF assets have increased by 660% over the past decade, starting from US$78 billion and reaching US$596.4 billion in net assets at the end of February. They have also been taking an increasing share of the ETF market, hitting 22% at end-February compared to 17% four years ago.

Among advisors who use the products, 78% plan to increase their allocations, with 39% aiming to boost their exposure by 1% to 5% of overall AUM; 25% targeting a 6% to 10% increase; and 14% looking to increase their positions by 11% or more.

Courier Capital, an independent advisory firm managing around US$1.2 billion in assets, has some 10% to 15% of its AUM in smart-beta ETFs. Steven Gattuso, the firm’s CEO, said around 70% of their new client assets are going into ETFs, and “a large portion of that is going into smart-beta ETFs,” he told Financial Advisor IQ.

“[I]f they want to have the lowest cost available while they are getting exposure to an asset class, then their money will be in ETFs and most likely in smart-beta ETFs,” he said.

While advisors generally agreed that getting additional stakes in smart-beta ETFs would be a good move, they had different approaches to selecting the specific products they want to invest in.

Gattuso said he scrutinizes the prospectus to figure out the pure exposure for each factor used. “For example, for a dividend-based strategy, one asset manager may only include companies with dividends paid consecutively for 10 years, while another asset manager may include companies that paid dividends over any time frame,” he told the publication.

At Philadelphia-based Key Financial — which handles around US$700 million in assets — firm president Patricia Brennan prioritizes the methodology and rationale of the smart-beta ETFs’ managers. “I need to know how they choose the factors they invest in, and why they are choosing one factor over another,” she said.

As for Massachusetts-based Axial Financial, which handles US$1.2 billion in assets, Portfolio Management Director Paul Miller takes note of the level of concentration of an index. “Some low-volatility ETFs will create a specific sector but not limit the overweight and underweight, so you end up owning too many utilities or energy stocks that can slap you in the face when those particular stocks go out of favour,” he said.


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