Credit: Shutterstock photoSmart beta continues to be a topic of significant interest in the institutional and retail investing communities. In the past 2 years First Bridge has published two frequently cited short articles on the subject. The first defined and sized the smart beta space for US listed ETFs. The second classified the ETF launches in 2015 by smart vs. traditional beta exposure.
In this article we expand our market sizing analysis to include all ETFs globally, by using First Bridge’s global ETF data & analytics.
As a first step, it is useful to revisit our definition of smart beta. In the equity space, we define a smart beta ETF as:
An ETF that tracks a rules based index providing exposure to a specific investment risk factor other than market cap weighted size, style (growth/value) or industry sectors.
The concept is extendable to other asset classes such as bond and commodities, where ETFs provide exposure to specific factors by using non-traditional weighting schemes. The philosophy behind our smart beta classification framework can be reviewed in our smart beta definitions guide.
First Bridge estimates that as of end September 2016, the total size of the global smart beta ETF market was $347 B i.e. 10.1% of global ETF assets. We can draw some basic conclusions from looking at the adoption of smart beta ETFs.
1. Smart Beta is more established in the equity space
The table below shows for the major asset classes, ETF assets split into 3 categories – smart beta, traditional beta and active / other. (All leveraged and inverse ETFs are included in the 3rd category). In the equity space, smart beta ETFs account for 13% of all ETF assets globally. By contrast, smart beta makes up only 1.1% of all global bond ETFs and 3.4% of all commodity ETF assets.
Includes: Active (Non-indexed); Leveraged / Inverse & Proprietary quant models
Data source: www.firstbridgedata.com; As of September 30, 2016
2.Popular Equity Categories: Dividends, Low Volatility & Multi-Factor
In the last 5 years, we have seen the introduction of a range of smart beta equity strategies in the ETF wrapper, particularly from new entrants. However 3 types of strategies still make up 80% of these assets.
- Dividend: Dividend ETFs still account for almost half of all smart beta equity ETF assets globally. Typically these ETFs fall into one of two categories – those focused on high dividend yield and others focused on regular dividend payors.
- Low Volatility: First introduced in the ETF form after the 2008-09 downturn, low volatility has become a popular smart beta category. These ETFs account for 16% of equity smart beta assets, and also typically fall into one of two categories. One approach (adopted by ETFs like ‘SPLV’) is where the investor is getting more ‘pure’ factor exposure to low volatility stocks even if it results in a high sector concentration or divergence from the parent index. The second (adopted by ETFs like ‘USMV’) is where exposure to the low volatility factor is traded off against lower divergence from the cap weighted parent index and limits on sector exposure. There is no ‘correct’ approach and investors may adopt either one based on their individual investment objectives.
- Multi-Factor: These ETFs make up 15% of equity smart beta assets. They track underlying indices that use multiple factors such as low volatility, high quality and momentum in their stock selection and weighting methodology.
Data source: www.firstbridgedata.com; As of September 30, 2016
3. Popular Smart Beta Bond Categories: Duration Optimized & Laddering
As noted, smart beta still accounts for only 1.1% of global bond ETF assets. A growing category is ‘duration optimized’ or ‘interest rate hedged’ products that are designed to help investors mitigate the impact of rising rates on longer duration portfolios. 15% of smart beta bond ETF assets are in ‘laddered’ portfolios.
Data source: www.firstbridgedata.com; As of September 30, 2016
Overall, at 13% of assets, smart beta adoption appears to have become more established in the equity ETF space. We can expect to see the adoption of more non-traditional ETFs in the bond and commodity asset classes, with smart beta likely to hit the 5% share threshold in these asset classes in the next few years.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
