Assailed and derided because some critics simply do not like the implications of the term “smart beta,” smart or strategic beta exchange traded funds continue to make significant inroads with financial advisors.
According to FTSE Russell’s first US retail financial advisor market survey - Smart Beta: 2015 survey findings from U.S. financial advisors, 68 percent of financial advisors polled are using smart beta ETFs and 70 percent are using multiple strategic beta approaches.
A recent survey by Create-Research found that smart beta ETFs account for over $300 billion, or 18 percent of the U.S. ETF market, by far the largest ETF market in the world.
The demographics of advisors using strategic beta ETFs are telling.
“Aadvisors utilizing smart beta products tend to be younger, have a higher share of AUM in ETFs and alternative investments, and have practices which extend beyond the core activities of investment selection, asset allocation and financial planning,” according to FTSE Russell.
Smart beta ETFs are broadly defined as those funds that do not adhere to market capitalization weighting. FTSE Russell, the combination of FTSE Group's indexing business and Russell Indexes, is one of the largest purveyors of fundamentally-weighted indexes. In fact, some of the ETFs that started the smart beta movement track FTSE indexes.
For example, the PowerShares FTSE RAFI US 1000 Portfolio PRF, which is home to nearly $4 billion in assets under management and will celebrate its tenth anniversary later this year, tracks a FTSE index.
PRF's underlying index “is designed to track the performance of the largest US equities, selected based on the following four fundamental measures of firm size: book value, cash flow, sales and dividends,” according to PowerShares.
Equal-weight ETFs are among the most popular smart beta strategies and that methodology has benefited some new funds. For example, the PowerShares Russell 1000 Equal Weight Portfolio EQAL debuted in late 2014 and has nearly $142 million in assets under management. EQAL, which tracks a Russell index, takes equal-weighting a step further by applying the methodology to its individual holdings as well as the nine sectors represented in the fund.
“Advisors are most likely to use a smart beta approach that weights companies by historical dividend
yield, with 36% adopting this type of smart beta investment product and 35% interested in using it,” said FTSE Russell. “High quality (27%), equal weight (26%) and fundamental (23%) are the next most widely used smart beta investment products after dividend.”
FTSE Russell has a growing footprint in the dividend and quality indexing arena thanks in part to O'Shares Investments, the ETF issuer run by “Shark Tank” star Kevin O'Leary.
FTSE Russell is the index provider behind the O'Shares FTSE US Quality Dividend ETF OUSA, a dividend fund which has needed just over two months of trading to amass $25.6 million in assets under management. O'Shares also turned to FTSE Russell for the Asian and European equivalents of OUSA, the O'Shares FTSE Asia Pacific Quality Dividend ETF OASI and the O'Shares FTSE Europe Quality Dividend ETF OEUR, as well as the currency hedged answers to those funds.
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