Smart beta and active strategies to drive second wave of ETF growth

Nov 6th, 2015 | By | Category: ETF and Index News

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The rising dominance of exchange-traded funds as the investment vehicle of choice looks set to continue as demand for more sophisticated products picks up, according to a survey from ETF.com, a US-based exchange-traded fund news wire, and Brown Brothers Harriman, a leading ETF services provider.

Smart beta and active ETFs to drive second wave of ETF growth

Almost all survey respondents plan to maintain or increase their smart beta ETF exposure over the next year.

The survey seeks to gauge the market sentiment of ETF-focused US financial advisors and examines trends among advisors when it comes to the ETF selection process, the relative value of index brands, ETF provider reputation, newly launched ETFs, and emerging strategies such as active management and smart beta.

The birth of ETF-based investing was driven by traditional passive products, but innovative products which offer risk and return enhancements, such as smart beta ETFs, appear set to fuel a second stage of growth in the industry with 99% of respondents planning to maintain or increase their exposure to smart beta over the next year.

“In the current US investment environment, investors are seeking access to lower cost strategies that provide alpha, diversification and lower risk,” said Shawn McNinch, Senior Vice President and Global Head of ETF Services at BBH. “As a result, ETF sponsors have continued to evolve their product sophistication by launching more smart beta, active, and currency-hedged ETF products.”

“2015 has been one of the most exciting years ever in terms of innovation, adoption, and overall growth in the ETF market,” added Matt Hougan, Chief Executive Officer of ETF.com. “The results of our Annual Advisor Survey, conducted with BBH, show that advisors are eager to adopt these new, innovative ETFs.”

When it comes to selecting funds 56% of investors tended to favour the fund issuer’s brand as opposed to the provider of the underlying index. Looking forward the survey found that advisors would like to see more alternative and international fixed income funds.

Criticisms that the intraday liquidity provided by the ETF structure can foster overtrading in investors accounts were not supported by the survey’s findings with 73% of respondents making between one and five trades in a client account per month. This places greater importance on long-term holding costs, such as expense ratios, as opposed to trading costs (i.e. commissions and spreads).

Principal amongst advisor concerns is the issue of ETF liquidity with 59% of respondents feeling they need more education. This is understandable given the level of concern around the risk that ETFs will suffer trading issues in the event of outsized fund redemptions. This is of particular concern in fixed income ETFs where a lack underlying liquidity could lead to dramatic price falls. Recent market volatility highlighted the need to understand how these products react in certain market conditions.

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