Strategic beta ETFs underutilised, finds survey

Feb 24th, 2017 | By | Category: Equities

Hartford Funds, the US-based mutual and exchange-traded fund provider, has released survey data showing that market volatility and geopolitical events are fuelling investor anxiety, yet most aren’t taking advantage of the full range of factor-based investment solutions available to them, namely strategic beta ETFs.

Smart beta strategic beta underutilized Hartford Funds

The survey by Hartford Funds shows that of the 36% of advisors who do not invest in strategic beta at all, 41% claim they are not familiar enough with the concept.

Strategic beta, also known as smart beta, follows a rules-based methodology that seeks to increase exposure to certain risk factors, such as value, size, momentum and volatility, relative to traditional market-cap weighted indices. There is strong empirical support indicating the approach has produced significant and persistent outperformance on a risk-adjusted basis compared to market cap-weighted benchmarks over the long term.

The survey of nearly 800 investors and more than 300 financial advisors found that while most advisors (62%) report being at least somewhat familiar with strategic beta ETFs, 72% either don’t use them at all (36%) or only have 0-10% of client portfolios invested in these solutions (36%). Of those advisors who do not invest in strategic beta ETFs, 41% claim it is because they simply are not familiar enough with the strategies. This disconnect is trickling down to investors too, as only 14% claim to be familiar with the approach.

“As strategic beta ETFs proliferate the marketplace, advisors have an enormous opportunity to educate themselves and their clients about their potential advantages,” said Ted Lucas, head of Systematic Strategies and ETFs at Hartford Funds. “These investment products have the potential to help clients solve for specific objectives like growth, volatility and income – typically at a lower cost than traditional actively managed mutual funds.”

The survey also revealed that investors are primarily concerned about market volatility (36%) and geopolitical events including elections and political unrest (22%) when thinking about their investments, yet most don’t have products incorporated into their portfolio to help address these challenges. Similarly, advisors cited the potential to achieve index outperformance (33%) and diversification (30%) as some of the most attractive features of these products, yet are underutilising them.

Lucas continued, “Strategic beta ETFs provide advisors with an opportunity to help investors with the challenges in today’s low-growth and potentially volatile market environment looking forward. While strategic beta usage has often been tactical to date, many multifactor strategic beta products were designed for core allocations and long-term investments.”

The overwhelming majority of advisors consider strategic beta to be a tactical investment tool rather than a strategic “core” investment tool (72% compared to 28%). These findings align with the fact that only 5% of surveyed financial advisors allocate between 20-30% of assets to strategic beta in client portfolios, while another 5% of advisors allocate more than 30%.

Hartford Funds offer five multifactor strategic beta ETFs focusing on US equities, developed markets ex-US equities, emerging markets equities, global small-cap equities and US real estate investment trusts (REITS) respectively. The funds seek to maximise exposure to value, momentum and quality factors while having risk controls that ensure appropriate diversification.

The survey of 794 investors and 348 advisors was executed both in-person and via phone during the months of October and November 2016.

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