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Smart Beta ETFs, Highly Popular, Face One Big Challenge

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M ore than two-thirds (68%) of financial advisors are using smart beta ETFs -- but roughly a third don't know it, according to a new study. Only 35% of financial advisors in the survey reported having used a smart beta exchange traded fund without the help of descriptive examples and other prompts. But when prompted by specific product names, 68% described themselves as users, index provider FTSE Russell found in its first U.S. retail financial advisor Smart Beta market survey, which was released Monday ahead of a major ETF industry conference.

Smart beta ETFs -- based on factors such as size, value and momentum -- have been shown to produce excess returns in the U.S. stock market . They're exploding in popularity, according to investment research firm Morningstar Inc. Today, there are roughly 350 smart beta ETFs in the U.S. holding $230 billion in assets.

On Wednesday, investment experts at the sixth annual Morningstar ETF Conference in Chicago will lead a morning panel on whether factor-focused funds can be equally effective in the foreign context. The conclave begins today and concludes Thursday.

Less than one in five financial advisors in FTSE Russell's Smart Beta survey reported that they are very familiar with the term "smart beta." Lack of knowledge was one of the top reasons financial advisors gave for not using these ETFs. But 89% of nonusers were interested in trying out these products when shown specific examples.

The widespread unfamiliarity with the term "smart beta" shows that index and ETF providers "need to ramp up their educational programs focused on the advisor community," said Rolf Agather, a managing director at FTSE Russell who is attending the ETF conference.

Still, "it is clear that retail advisors are embracing investment products based on these indexes as a way of incorporating new ideas into their clients' portfolios," he added.

Smart beta ETFs and mutual funds track indexes that are weighted differently than market-cap-weighted benchmarks. Typically, they provide a way to boost returns or adjust risk for successful investing .

But the study found fairly widespread confusion and disagreement about the definition of smart beta as well as the distinction between active and passive investing. In fact, some advisors consider smart beta as a form of active management.

"While the selection of a smart beta product can require almost as much due diligence as selecting an active manager, it is important to keep in mind that the underlying smart beta index is transparent and rules-based; there is no active decision as to what securities are included or excluded within the index," the report noted.

Among financial advisors using smart beta ETFs, products that weight companies by historical dividend yields were most popular (used by 36% of advisors), followed by ETF investment strategies focused on high quality (27%), equal weighting methods (26%) and fundamentals (23%).

The most common reasons for using smart beta products were to protect portfolios in down markets, control volatility and increase alpha.

More than 70% of smart beta users followed more than one type of approach.

The FTSE Russell study also found that financial advisors using smart beta products tend to be younger and have RIA (registered investment advisor) designations.

The study was conducted in June 2015 and drew responses from 307 financial advisors, each of whom had more than $20 million in assets under management, at least 4% of AUM invested in ETFs and at least 20% fee-based annual revenue.

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.

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