Smart Beta Slows Down

Asset managers last year launched fewer factor-based ETFs globally, according to Cerulli Associates.

Illustration by II

Illustration by II

The rise of smart beta may have reached a plateau — at least temporarily.

Exchange-traded fund providers last year launched fewer of these rules-based funds, which offer exposure to investment factors like value and momentum, according to a Cerulli Associates report Wednesday. Citing data from Morningstar, Cerulli said just 132 strategic beta ETFs were launched globally in 2018, a 49 percent drop from 2017.

“If smart beta is supposed to represent a radical disruptive influence on both asset management in general and ETF issuers specifically, the numbers suggest that the revolution may be stalling,” Fabrizio Zumbo, associate director of European asset management research at Cerulli, said in a statement on its findings.

The global drop in smart beta funds may be partly tied to a broader saturation of the European market for ETFs, according to the consulting firm’s report. Meanwhile, a Cerulli report from January that focused on the U.S. ETF market suggested that more smart beta ETFs may be under development.

Fifty-seven percent of ETF providers surveyed by Cerulli last year said they were currently developing strategic beta products, while 11 percent said they planned to develop them, according the firm’s January report.


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In Europe, the market share of ETFs and other exchange-traded products has held steady at 7.5 percent of total assets for the last 12 months, according to Cerulli. Still, the firm found that said nearly all types of factor-based ETFs attracted inflows last year, with only value ETFs suffering outflows. The most popular smart beta products in Europe as of the end of last year were dividend-based ETFs, followed by risk-oriented products like low-volatility ETFs.

According to Cerulli, these investor preferences have not necessarily been a good predictor of actual market returns.

“The recent enthusiasm for low-volatility strategies, for example, seems slightly at odds with returns for the calendar year 2018,” Zumbo said. Citing data from index provider S&P Dow Jones, he noted that European low-volatility funds fell by 1.9 percent last year, while the top-performing strategy, enhanced value, delivered a 9.5 percent return.

The S&P Europe 350 index of large-cap stocks, meanwhile, lost 1 percent in 2018.

Over the last ten years, Cerulli reported that all 11 factor styles identified by S&P Dow Jones — quality, dividend aristocrats, low volatility, momentum, multi-factor, low volatility/high dividend, buyback, equal weighted, dividend opportunities, high-yield dividend aristocrats, and enhanced value — outperformed the S&P Europe 350, with the first five also delivering lower levels of volatility.

In the U.S., meanwhile, Cerulli said returns for smart beta ETFs have been slightly lower compared to their benchmark — a result Cerulli attributed primarily to management fees.

“Another plus for European smart beta ETFs is that the expense ratios charged by most are far more competitive than those of their actively managed peers,” Zumbo said. “Crucially, smart beta ETFs’ expenses compare well with those of plain vanilla index trackers.”

According to Cerulli, European smart beta ETFs charged fees of just about 8 basis points higher compared to passively managed funds across all asset classes, or 13 basis points compared to passive equity products.