U.S. Markets open in 8 hrs 44 mins

Institutions to Ratchet up Use of Smart Beta ETFs


It is not a stretch to say that 2013 has been the year of “intelligent indexing” or “smart beta” strategies  gaining prominence in the exchange traded funds industry.

The growth of smart beta ETFs may just be getting started as institutional investors plan to boost their usage of these ETFs. Increased use of intelligently indexed ETFs at the institutional level jibes with plans by pension funds, endowments and other institutions to increase overall use of ETFs. [Institutional Investors to Boost Use of ETFs]

A new study by Cogent Research indicates “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%),” according to a statement from PowerShares, the fourth-largest U.S. ETF sponsor.

Data for the study were collected from 193 participants between September 5 and October 2, 2013.  A 15-minute online survey was administered by Cogent Research, a division of Market Strategies International, to institutional decision makers, including pensions, endowments/foundations, non-profit institutions, mutual funds, as well RIAs who manage institutional assets. All institutions had at least $20 million in assets and allocated at least 1% of their assets to ETFs. Institutional RIAs had at least $25 million in assets under management – a portion of which was managed on behalf of institutional investors, according to the statement.

Bigger institutions, those managing more than $500 million, are even more inclined to agree that smart beta ETFs provide better risk-adjusted returns relative to market cap weighted ETFs, PowerShares notes.

“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, in the statement. “The study results reveal that more than half of institutional decision makers agree that smart beta ETFs can be used to manage portfolio volatility.”

In an interview with ETF Trends last month, Draper noted that smart beta ETFs encompass a broad range of concepts, including  low volatility, smart beta and multi-factor funds comprised of equities selected based on cash flow, book value, sales and dividends. [Breaking Down the Smart Beta Space]

Survey respondents identified a number of ETF providers that offer smart beta products, however, nearly three-quarters (72%) of current smart beta users indicate PowerShares offers truly innovative ETFs. Another 62% believe Invesco PowerShares offers a breadth and depth of ETF offerings, and is a product and service innovator in the category, according to the statement.

Eight of the top-10 PowerShares ETFs in terms of 2013 asset gathering can be considered smart-beta ETFs, including the PowerShares Buyback Achievers Portfolio (PKW) , PowerShares FTSE RAFI US 1000 Portfolio (PRF) and the PowerShares S&P 500 High Beta Portfolio (SPHB) . [High Beta ETFS are Winning]

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.