Many times on the Blog, we highlight trends within the ETF
industry. One major development that really stood out last year,
more so than the others, was the considerable growth we saw in
strategic beta - an investing strategy that we believe will
continue to be a significant contributor to ETF flows in 2014 and
for years to come.
What "Strategic Beta" Means
Before discussing the flows, let's first explore what we mean
by "strategic beta". While there is no single definition for
strategic beta ETFs, it can most easily be defined as investments
based on indexes that are
. Unlike traditional market-cap weighted index funds, strategic
beta equity funds hold a basket of stocks that are selected and
weighted by characteristics other than company size. For example,
one strategic beta fund may focus on high dividends while others
may emphasize low volatility, momentum or quality. The objective
of strategic beta is to improve performance by passively tracking
an index that is not based on market-cap weighting. In other
words, strategic beta is an enhanced form of passive
Traditionally, tracking such targeted market exposure was only
feasible through actively-managed funds pursuing
. Not anymore.
In 2013, we saw a record-breaking $65 billion flow into
strategic beta equity ETFs, nearly a third of total ETF industry
flows. That's almost double the $34 billion we saw flow into this
space in 2012.
Strategic beta equity funds gathered a record total of
$65.1 billion - nearly a third of global industry flows in 2013
- with asset growth in excess of 50%.
Categories within Strategic Beta
Two categories within strategic beta equity captured the
majority of these flows:
1. Equity dividend ETFs
. Many investors last year turned to equity dividend ETFs to meet
their income needs in the low interest rate environment, and we
believe they will continue to do so. Many retirees in need of
income with an opportunity for capital appreciation may also
gravitate toward these types of investments.
2. Minimum volatility ETFs
. One of the biggest concerns we hear from investors today is
related to the recent run up in stocks. As a result, investors
may be hesitant to invest in equities because they fear increased
risk and stretched valuations. These concerns lead us to believe
that minimum volatility ETFs may serve as compelling solutions to
such investors in the current market environment as these funds
are designed to provide diversified access to stocks with lower
expected volatility than the overall market.
As investors seek strategic beta solutions, and as these
solutions become more readily available, it's important to keep
in mind that no matter the strategy, diversification is key.
Strategic beta is meant to compliment a diverse portfolio of
investments, not replace market-cap weighted funds