Data suggest that alternatively- and fundamentally-weighted exchange traded funds (ETFs), also known as smart beta funds, are gathering assets at a record-breaking pace. Advisors and investors expect that trend to continue.

In its year-end ETF market observations, done in conjunction with ETF.com, ETF custodian Brown Brothers Harriman & Co. revealed ETF users have enthusiasm for smart beta strategies, but that more education is needed.

“The 2017 survey polled 360 financial advisors and institutional investors on their ETF selection process and criteria, including their comfort with newly launched ETFs, portfolio construction strategies, and plans for investing in emerging ETF strategies,” according to Brown Brothers Harriman.

Nearly two-thirds of the survey's respondents said they like the versatility offered by smart beta strategies, but over a third (34%) said they are unfamiliar with smart beta, according to the survey. Year-to-date, each of the top 10 ETFs in terms of new assets added are cap-weighted funds.

There are other promising data points regarding market participants' use of smart beta strategies. For example, multi-factor ETFs, widely regarded as one of the primary sources of future smart beta growth for smart beta, are expected to see increased adoption.

“Demand is up for multi-factor ETFs: 60% are currently using or most likely to use a multi-factor strategy and 32% plan to increase their allocation,” according to Brown Brothers Harriman.

Multi-factor ETFs are catching on with advisors and investors as more market participants realize timing the success of individual investment factors, such as growth and value, from year-to-year is difficult. ETFs in this genre typically combine several factors and weight stocks accordingly. For example, the fast-growing JPMorgan Diversified Return U.S. Equity ETF (JPUS) combines the momentum, quality and value factors.

There is also greater interest in ETFs that adhere to environmental, social and governance (ESG) investing principles.

“This year's survey, which measures the expectations and preferences of sophisticated ETF investors in the US, found greater interest in Environmental, Social and Governance (ESG) ETFs, with 51% of investors finding ESG at least somewhat important vs. 37% last year,” according to Brown Brothers Harriman.

There is ample room for growth for ESG ETFs. In the U.S., the world's largest ETF market, there are approximately 50 ETFs that are classified as ESG funds and only one has close to $1 billion in assets under management and only eight have more than $100 million in assets.

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