Institutional investors report they are increasingly using smart beta exchange-traded funds (ETFs), according to a new study conducted by Cogent Research, a division of Market Strategies International.
According to the study, larger institutions are twice as likely to agree that smart beta ETFs provide better risk-adjusted returns relative to market cap weighted ETFs.
The study reveals that more than half (53%) of institutional decision makers will increase their use of smart beta ETFs over the next three years – higher than any other ETF category, including market-cap weighted ETFs (48%).
“These results echo what we are hearing from our clients and confirms what we have seen with industry-wide flows: non-market cap weighted ETFs have captured 25% of the equity ETF inflows year to date, despite representing only 12% of the assets,” said John Hoffman, Invesco PowerShares director of ETF institutional sales and capital markets.
“Furthermore, the research results show that interest in the smart beta category is being driven by a desire to improve risk-adjusted returns, reduce volatility and gain access to more sophisticated weighting methodologies.”
According to the study, larger institutions (those managing in excess of $500 million in assets) are twice as likely to agree that smart beta ETFs provide better risk-adjusted returns relative to market cap weighted ETFs – highlighting the focus on managing risk in today’s market.
“We are seeing an increasing amount of interest and usage of non-market cap weighted solutions among institutions,” said Dan Draper, Invesco PowerShares managing director of global ETFs. “The study results reveal that more than half of institutional decision makers agree that smart beta ETFs can be used to manage portfolio volatility.”
Commenting on the PowerShares line-up, Draper said, “We’ve been working diligently to educate investors and to build awareness for our smart beta offerings. We believe our broad range of solutions can be used to meet the current and future challenges of institutional asset managers.”
Full research results will be released in the first quarter of 2014.