Advisors' love-hate relationship with smart beta

Conflicting poll findings paint a complicated picture of how financial professionals view the strategies

Advisors' love-hate relationship with smart beta

With a rich diversity of smart-beta factors and products available to the investing public, it wouldn’t be a stretch to call that burgeoning corner of the ETF space “complicated.” And that very same word, it seems, could apply to advisors’ attitudes toward such strategies.

In a survey of investors and fund managers released earlier this year, Brown Brothers Harriman found that global market volatility has ignited an interest in smart-beta and active ETF products. Notably, it found that 92% of respondents from the US have at least one smart-beta ETF, with 26% of those respondents using it to replace an active mutual fund. The study also found increased attention being paid to a fund’s past performance which, according to BBH’s Head of US Sales Shawn McNinch, is usually an active filter.

“Some of your traditional screening criteria could be coming into play with smart beta as well as active ETFs, as more and more fund managers come into this space and start launching active ETFs as well,” McNinch told

But in a March survey of 350 advisors, Cerulli Associates saw only 21% using smart-beta strategies, suggesting a hesitation to adopt the products. The survey authors attributed this to ambiguity about factors and what the strategies aimed to accomplish.

Tyler Cloherty, senior manager at Casey Quirk, agreed with the assessment. He explained that advisors could hesitate to use smart-beta ETFs if it’s not clear “what’s truly driving the value behind those strategies and whether or not it actually makes sense in terms of the long-term investment philosophies.”

Another possible factor: advisors’ apparent difficulty in differentiating between strategic-beta and active funds. “If issuers are really diving into the rules and explaining how the product changes in regard to a specific kind of market condition, it’s possible they may make it sound like it’s an active ETF,” said Daniil Shapiro, associate director at Cerulli Associates. “Issuers should be focused on educating about the outcomes the products are supposed to achieve, as opposed to a highly technical explanation.”

Smart-beta products should appeal to two different groups of users, according to CFRA Senior Director of ETF Research Todd Rosenbluth. On one hand, they could pique the interest of veteran users of plain-vanilla ETFs who want to complement existing ETF asset allocations with products that reduce the risk profile or enhance returns. On the other hand, they could also attract longtime active mutual fund investors who want to transition to cheaper and more transparent products.

Nevertheless, Rosenbluth believes that advisors who are staying away from the strategies are doing so out of a need to avoid complexity. “If you’re an advisor running an asset allocation strategy, there’s little wrong with a market-cap-weighted approach and keeping it simple,” he said.

Shapiro arrived at a similar conclusion, noting that advisors who use multifactor products that significantly lagged the broader market will have a difficult time determining which variable led to the underperformance. The result: more complicated explanations to clients, and more challenging portfolio-adjustment decisions.


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