Smart beta or strategic beta funds are in the midst of a multi-year stretch of providing significant growth to the broader exchange traded funds (ETFs) industry. At the end of September, there were nearly 1,300 smart beta ETFs listed around the world with $644 billion in combined assets under management, according to ETF research provider ETFGI.

Another end-of-third-quarter statistic regarding smart beta ETFs to consider: As of the end of September, US-listed smart beta ETFs had seen year-to-date inflows of nearly $38 billion with the 10 largest funds in that group hauling in $15.5 billion since 2017 started.

Year-over-year asset growth has been stunning for some of the old guard smart beta strategies, such as growth, value and equal-weight. For example, the Vanguard Value ETF (VTV) has added nearly $6.7 billion in new assets over the past 12 months while inflows to the Vanguard Growth ETF (VUG) and the Guggenheim S&P 500 Equal Weight ETF (RSP) over that period are $2.9 billion and $2.2 billion, respectively, according to Bloomberg data.

That speaks to an interesting point about smart beta ETFs. Of the 15 largest such funds trading in the U.S, eight are dedicated to either growth or value stocks. However, investors have previously and are currently showing a taste for other fundamentally-weighted indexes.

Dividends: An Important Smart Beta Contributor

While equal-weight, growth and value funds are investor favorites in the smart beta space, the same can be said dividend ETFs. Of the smart beta ETFs with more than $1 billion in assets under management, 22 are dividend funds.

Prosaic dividend ETF strategies include selecting stocks by the length of dividend increase streaks or weighting by yield. Popular dividend ETFs, such as the Vanguard Dividend Appreciation ETF (VIG) and the ProShares S&P 500 Dividend Aristocrats (NOBL), mandate that member firms have dividend increase streaks of a certain amount of years, say 10, 20 or 25.

However, as smart beta has evolved, so has investors' taste. Some successful alternatives to dividend increase or yield weighting include ETFs that weight components based on cash dividends paid. The WisdomTree U.S. Quality Dividend Growth Fund (DGRW) goes even further.

That fund's underlying index holds companies “with the best combined rank of growth and quality factors. The growth factor ranking is based on long-term earnings growth expectations, while the quality factor ranking is based on three year historical averages for return on equity and return on assets. The Index is dividend weighted annually to reflect the proportionate share of the aggregate cash dividends each component company is projected to pay in the coming year, based on the most recently declared dividend per share,” according to the issuer.

International Flavor

U.S. investors are often biased toward domestic equities. The fund world proves as much, but smart beta is making significant inroads when it comes to international funds, both developed and emerging markets fare. Several of the largest smart beta ETFs are international funds and these products run the gamut of alternatively-weighted strategies from value to currency hedging to low volatility and more.

Multi-factor ETFs are also asserting themselves in the international space. The JPMorgan Diversified Return International Equity ETF (JPIN), which serves as an alternative to traditional cap-weighted MSCI EAFE strategies, is just three years old and already has more than $1.1 billion in assets under management.

JPIN focuses on the value, size, momentum and low volatility factors in an effort to disperse geographic and sector-level risk. In its three years on the market, JPIN has topped the MSCI EAFE Index by 230 basis points while being noticeably less volatile. Over that period, JPIN's maximum drawdown was 610 basis points less than that of the cap-weighted MSCI EAFE Index.

What To Expect

It is often said that among plain vanilla beta ETFs, “all the good ideas are already taken.” While that may true, that is not the case with smart beta and there are obvious avenues for growth in the smart beta sphere.

Currently, only a small number of fixed income ETFs meet smart beta criteria and of that group, only a few top $1 billion in assets under management. Data indicate advisors and investors are at least willing to consider alternatively-weight bond funds, so it would be reasonable to expect issuers to respond to that theme.

Additionally, socially responsible investing (SRI) and funds based on environmental, social and governance (ESG) principles are spouting up in bulk, indicating that these specialty funds are a potential source of future smart beta growth.

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