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This ETF Helped Start the Smart Beta Phenomenon


It’s safe to say smart beta exchange traded funds are more than just a fad. Data confirm as much.

The second annual study titled The Evolution of Smart Beta ETFs, conducted by Invesco’s (IVZ) PowerShares unit, the fourth-largest U.S. ETF issuer, and Market Strategies International, shows that use of smart beta ETFs by professional investors continues climbing. Institutional investors, including public and private pensions, endowments and registered investment advisors (RIAs), are increasingly favoring the alternative weighting methodologies made available by smart beta ETFs.

“Overall, smart beta ETFs accounted for 17% of US net ETF inflows in 2014, despite representing less than 11% of total assets. Today there are more than 350 smart beta ETFs available in the U.S. comprising over $230 billion in AUM, up from just 212 products and $64.8 billion in 2010,” according to the PowerShares study. [Smart Beta ETFs Keep Gaining Traction]

One of the ETFs that kick-started the smart beta movement is the PowerShares FTSE RAFI US 1000 Portfolio (PRF) , which celebrates its tenth anniversary in December. Invesco PowerShares Managing Director Dan Draper and Vice President of ETF Product Management John Feyerer joined ETF Trends publisher Tom Lydon to discuss PRF’s upcoming anniversary and, more importantly, the benefits of this ETF for advisors and investors.

“If you look at the way PowerShares, from the beginning, has tried to provide a broad toolkit to investors and advisors to build better outcomes, FTSE RAFI sits right in the middle of that,” said Draper. “It’s amazing now to have 10 years of history to go back and look at, certainly for advisors and investors that have been with us over the 10 years, really great performance.”

Now home to almost $4.6 billion in assets under management, making it one of the largest smart beta ETFs, PRF benchmarks to the FTSE RAFI US 1000 Index. “The Index is designed to track the performance of the largest US equities, selected based on the following four fundamental measures of firm size: book value, cash flow, sales and dividends. The 1,000 equities with the highest fundamental strength are weighted by their fundamental scores,” according to PowerShares.

When it debuted in 2005, PRF was seen as ground-breaking by some in the investment community while others criticized the notion of fundamental weighting. However, the ETF has earned its stripes. Over the past three years, PRF has outpaced the S&P 500 by 500 basis points. [Smart Beta Surge]

“As we stand here now, 10 years later, I think it’s interesting to look back because so much of the criticism at the outset was this is just a repackaged value index,” said Feyerer. “Well, guess what. We have 10 years now of live data and we have 10 years during which growth outperformed value. If that was true to the case, you’d expect the FTSE RAFI strategy to underperform when, in fact, the exact opposite has happened.”

As PRF has consistently outperformed rival cap-weighted funds, investors have progressively warmed to the ETF’s story. Over the past year, the ETF has added $823 million in new assets, good for the best inflows total among all PowerShares ETFs.

PowerShares issues several other ETFs that follow the FTSE RAFI methodology, including the $415.9 million PowerShares FTSE RAFI Emerging Markets Portfolio (PXH) and PRF’s small- and mid-cap relative, the $1.1 billion PowerShares FTSE RAFI 1500 Small-Mid Portfolio (PRFZ) .