Various data points continue confirming the growth trajectory of exchange-traded funds (ETFs) that do not follow cap-weighted indexes, also known as smart beta. The fifth annual global institutional smart beta survey from index provider FTSE Russell suggests that substantial percentages of global asset owners are already embracing fundamentally weighted strategies or are considering doing so.
"In 2018, 91% of asset owners globally have a smart beta investment allocation, have evaluated or are planning to evaluate smart beta in the next 18 months," said FTSE Russell.
At the end of the first quarter, there were fewer than 1,300 smart beta exchange-traded products (ETPs) listed around the world, less than half the number of cap-weighted products. However, smart beta ETPs had over $641 billion in combined assets under management and have experienced a compound annual growth rate (CAGR) of 32.6% over the past five years compared with 20.9% for cap-weighted funds, according to ETFGI data.
While more than half of asset owners in the U.K. and the U.S., the world's largest ETF market, remain unsure of the best smart beta approach, the FTSE Russell survey shows a 16% increase in smart beta use and consideration over the past five years. Within the smart beta arena, multi-factor funds are expected to be a significant source of growth. Multi-factor ETFs combine exposure to several investment factors, such as growth, low volatility and value. (For more, see: Multi-Factor ETFs Come of Age.)
"Among global asset owners surveyed in 2018, multi-factor combination smart beta strategies were used by 49%, a notable rise from 20% when first measured in 2015," said FTSE Russell. "Among global asset owners surveyed in 2018, multi-factor combination smart beta strategies were used by 49%, a notable rise from 20% when first measured in 2015." Some of the most popular multi-factor ETFs include the JPMorgan Diversified Return International Equity ETF (JPIN), Goldman Sachs ActiveBeta US Large-Cap ETF (GSLC) and the FlexShares Quality Dividend ETF (QDF).
The FTSE Russell survey also highlights growing interest in environmental, social and governance (ESG) strategies, an area widely expected to be a new growth frontier for smart beta funds.
"Though a relatively new entry into FTSE Russell's annual survey, smart beta indexes measuring environmental, social & governance (ESG) factors are clearly on the rise," said FTSE Russell. "Nearly 40% of asset owners surveyed anticipate applying ESG considerations to a smart beta strategy in the next 18 months. And, notably, asset owners are looking to ESG index-based strategies for performance reasons and not just asset allocation or societal good. In 2018, 44% of asset owners surveyed were considering ESG for performance reasons, a 13% increase from 2017 when ESG smart beta index awareness and usage was first measured." Just eight U.S.-listed ESG ETFs have over $100 million in assets under management. (See also: ESG ETFs Look to Catch Traditional Rivals.)