Strategic beta ETFs suffering from mixed messages, finds Cerulli

Jul 25th, 2017 | By | Category: ETF and Index News

New research from Cerulli Associates, a global research and consulting firm, finds there is a misalignment between US ETF issuers and advisors on the use and implementation of strategic beta. Nearly two-thirds of ETF issuers claim to position strategic beta as a replacement for passive ETFs, but nearly two-thirds of advisors who use strategic beta report using such products to replace active mutual funds.

Strategic beta ETFs suffering from mixed messages, finds Cerulli

Cerulli finds some major disconnects between the perceptions of ETF issuers and what advisors are actually reporting.

Implementation strategies also appear to display a mismatch between issuers and advisors. Cerulli finds that advisor use of strategic beta is more focused on the notion of risk mitigation rather than alpha generation. More than 60% of issuers report they are positioning strategic beta to generate alpha, whereas the most cited reason why advisors are using strategic beta is for downside protection.

The findings come from Cerulli’s latest report into the US ETF market. Jennifer Muzerall, associate director, Cerulli, commented: “While strategic beta can achieve both investment objectives, issuers’ messaging may not be resonating with advisors. Our findings from our latest ETF report reveal a huge education gap that issuers need to address. Issuers need to continue to develop their message to help advisors understand the benefits and uses of strategic beta.”

Cerulli’s research indicates that ETF issuers have a long way to go to increase strategic beta adoption among advisors. To encourage the adoption of strategic beta, ETF issuers need to address the mixed messages about how to position strategic beta in a portfolio, and what advisors are looking to achieve by using strategic beta.

The report also indicates a disconnect between issuers’ perception of unmet demand for certain strategies and asset classes, and the reality that advisors are reporting. Environmental, social and governance (ESG) strategies display the largest disparity, with 59% of issuers perceiving there is unmet investor demand for these products but only 11% of advisors reporting this is the case.

Issuer optimism for demand has led to recent launches in the ESG space. Cerulli reports that some issuers anticipate building out entire suits of ESG ETFs, with one-third of issuers claiming ESG will be a primary focus for their product development plans, citing client demand for these types of strategies. However, Cerulli believes that this demand remains isolated evidenced by the low number of advisors reporting unmet demand for ESG products.

Other products that show a large difference between the unmet demand perceived by issuers and reported by advisors are US fixed income (47% of issuers versus 16% of advisors), multi-asset (41% versus 22%), international fixed income (31% versus 17%) and emerging markets (28% versus 18%).

The only two asset classes or strategies where advisor reported unmet demand outstrips issuer perceived unmet demand is sector equity (6% of issuers versus 14% of advisors) and currency (6% versus 24%).

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