Smart Beta ETFs Keep Packing On Assets

As the smart or strategic beta landscape has evolved in recent years, there have been plenty of estimates, forecasts and studies calling for exponential growth for those exchange traded funds that follow fundamentally-weighted indexes or adhere to index methodologies beyond weighting by market value.

Data And Prior Estimates

Data confirm those estimates are proving accurate. New data from BlackRock, Inc. BLK, parent company of iShares, the world's largest ETF sponsor, indicate 2016 is proving to be a banner year for smart beta funds. As of November 20, smart beta ETFs around the world attracted $45 billion in new assets compared with $30 billion for all of 2015, according to BlackRock.

BlackRock's expansive lineup of smart beta ETFs, which includes well-known names such as the iShares Edge MSCI Min Vol USA ETF, iShares Trust USMV, and the iShares Edge MSCI USA Quality Factor ETF QUAL, have seen 2016 inflows of $20 billion, double the total seen all of last year.

Smart Beta ETFs

The data jibe with prior estimates forecasting more rapid growth for smart beta ETFs. Earlier this year, in its third annual survey of institutional investors and their views on smart beta products, FTSE Russell found professional investors are expected to ratchet up their use of smart beta ETFs.

“The percentage of asset owners reporting that they are currently evaluating smart beta has doubled since 2014 and 2015 levels. This growth has come from asset owners who had not previously evaluated smart beta, as well as from asset owners who have evaluated smart beta in the past, but who choose not to implement, and who, we believe, are again evaluating smart beta,” according to FTSE Russell.

In May, BlackRock revealed data that showed smart beta ETF assets will reach $1 trillion on a global basis by 2020 and then more than double to $2.4 trillion by 2025. The global ETF industry currently has north of $3 trillion in assets under management.

Factor ETFs

Factor ETFs, such as QUAL, have also been popular with investors.

“Because they are driven by different economic rationales, they have tended to outperform at different times. For investors with a shorter time horizon and a reasonable appetite for risk, this cyclicality presents an opportunity to tilt portfolios towards one factor versus another in pursuit of incremental returns,” said BlackRock.

The firm is underweight the quality while holding neutral views on the once red-hot low volatility factor as well as size and value. However, BlackRock is overweight momentum, which can be accessed via the iShares Edge MSCI USA Momentum Factor ETF MTUM.

MTUM tracks the MSCI USA Momentum Index and there is little in the way of perceived momentum surprises in the ETF or its underlying benchmark. Investors should look elsewhere if they want an ETF heavy on telecommunications or utilities stocks. Likewise, because these sectors have displayed less-than-impressive momentum traits, MTUM offers only token industrials and materials exposure while holding no energy.