Exchange-traded funds (ETFs) adhering to fundamentally weighted methodologies, also known as smart beta ETFs, are primary drivers of the ETF industry's rapid growth. At the end of January, smart beta ETFs listed around the world had over $530 billion in combined assets under management, and data suggest that the number is growing.

In its fourth annual survey of global institutional asset owners, index provider FTSE Russell explores institutional investors' adoption and usage of smart beta strategies. FTSE Russell surveyed 200 institutional investors from North America, Europe and Asia with an estimated $2 trillion in combined assets under management. The survey indicates that investors are widely embracing multi-factor ETFs, or those funds that tap multiple investment factors. While ETFs adhering strictly to a single factor, such as growth, low volatility and value helped make the smart beta movement mainstream, multi-factor ETFs are increasingly popular. (See also: Reducing Volatility With Europe ETFs.)

"The headline trend belongs to multi-factor combinations: 64 percent of respondents who are currently implementing a smart beta index are using a multi-factor strategy," said FTSE Russell. "That is more than triple the rate in the 2015 survey (the question was not even asked in the 2014 survey). Furthermore, 71 percent of those who have implemented a smart beta strategy for the first time within the last two years are using a multi-factor combination."

Examples of multi-factor ETFs include the JPMorgan Diversified Return U.S. Equity ETF (JPUS). JPUS, which tracks a FTSE index, emphasizes the momentum, quality and value factors. One of the aims of multi-factor ETFs is to help investors avoid pitfalls associated with factor timing. Historical data confirm that some factors outperform others during different years, with laggard factors becoming leaders and vice versa, scenarios that increase the difficulty of factor timing. (See also: An Introduction to Factor Investing.)

Data also indicate that large institutional investors are driving smart beta growth. "In contrast with last year, when the strongest growth in smart beta adoption came from asset owners with under $1 billion in AUM, this year the largest adoption gains are observed among asset owners with $1 billion to $10 billion AUM," said FTSE Russell. "In 2017, reported smart beta adoption among $1 billion to $10 billion asset owners is 57 percent, roughly on par with smart beta adoption rates among the largest asset owners with $10 billion or more AUM. Adoption among the largest asset owners has remained steady near 45 percent to 50 percent over the past three years."

In the U.S. this year, investors are moving away from U.S.-focused low volatility strategies, as highlighted by about $600 million in combined outflows from the iShares Edge MSCI Min Vol USA ETF (USMV) and the PowerShares S&P 500 Low Volatility Portfolio (SPLV). Amid concerns about higher interest rates, some high-yield dividend ETFs have lost assets, but some value-oriented funds are adding new money.

Important to the growth trajectory of smart beta is that current users of these ETFs consider more allocations to fundamentally weighted products. Data indicate that this is the case, as nearly two-thirds of asset owners with current smart beta exposure are considering other smart beta strategies, according to FTSE Russell. (See also: BofA Sees 'Seismic Shift' in Stock Investing.)