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The Next Generation of ETFs


As the exchange traded products industry adds to and evolves from traditional market capitalization-weighted offerings, issuers are increasingly using alternative indexing. The next wave of ETF evolution will come from creative index strategies, self indexing, active management and easy access to unique asset classes.

Asset managers who are thinking about putting their own strategy to work in an ETF wrapper can attend the upcoming ETF Bootcamp conference event that is slated for September 29 and 30 in New York City. [Asset Managers Take a Crash Course in ETF Industry]

There are currently 416 enhanced index-based ETF strategies on the market with $195.2 billion in assets under management, and 91 actively managed ETFs with $16.5 billion in assets, according to XTF data. In contrast, there are 1,623 U.S.-listed ETFs with $1.88 trillion in assets.

The universe of ETFs is quickly expanding and more providers are launching smart-beta ETF strategies to accommodate the growing demand from retail and institutional investors. Some of the more popular alternative indexing styles include equal-weight, fundamentally weighted, factor-based and low-volatility ETF strategies.

“Managers who use these methods to create portfolios are, in effect, combining elements of active and passive investing by actively creating portfolios, which may then be passively or more actively managed on a day-to-day basis,” according to WisdomTree.

Non-market cap weighted ETFs attracted over 29% of U.S. ETF equity inflows in 2013, despite only making up 19% of the total ETF universe. Investors, notably institutional pensions, endowments, foundations and asset managers, were attracted to the ETF’s transparency, liquidity and ease of implementation for both tactical and strategic allocations. [Institutional Adoption of Smart Beta ETFs on the Rise, Says Russell]

“The need to reduce portfolio volatility and access higher beta strategies are driving Smart Beta ETF Usage among institutional decision makers, while fee reduction and portfolio completion are more likely to drive usage of more traditional ETFs,” Tonny Ferreira, SVP, Sector Lead, Wealth Management Group at Market Strategies International, said in a recent webcast. [Institutional Investors, RIAs Warming Up to Smart-Beta ETFs]

Meanwhile, more asset managers are also dipping their toes into the actively managed ETF space, following the successful transition PIMCO made into the industry. More recently, Calamos Investments, the Chicago-based mutual fund issuer, is looking to build on its success in the mutual fund business with the introduction of the Calamos Focus Growth ETF (CFGE) . [Calamos Makes a Splash in Active Equity ETF Arena]

Additionally, the active space could also see another growth spurt if the SEC approves non-transparent active ETFs. Money managers like State Street (STT), BlackRock (BLK), Eaton Vance (EV), T. Rowe Price (TROW) and Precidian Investments have pushed for non-transparent offerings to help protect trade executions on day-to-day active management in an ETF wrapper. [Waiting on the SEC to Approve Non-Transparent Active ETFs]

For more information on smart-beta ETFs, visit our indexing category.