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Why the professionals are excited about smart-beta ETFs

Arian Neiron  |  28 Aug 2017Text size  Decrease  Increase  |  
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Smart-beta exchange-traded funds (ETFs) are increasingly being used by investors in their portfolios to reduce risk, improve returns and enhance diversification.


As their number on the ASX grows, smart-beta ETFs are increasingly replacing actively managed funds and market capitalisation index strategies in investors' portfolios, a new survey by VanEck reveals.

A smart-beta exchange-traded fund follows an index that uses investment-based construction rules to bring about a targeted investment outcome, rather than the traditional market-cap-weighted indices.

In 2012, there were five smart-beta ETFs listed on the ASX with $250 million invested. Today, that figure is $3.2 billion. There are now 34 smart-beta ETFs across a range of asset classes and strategies including factor-based and alternate indexing, such as equal weight. In Australia, this represents a five-year compound annual growth rate of 67 per cent.

Globally, smart beta is the fastest growing segment of the investment management industry, with over 1,200 products listed with US$592 billion of funds invested in ETFs.

In Australia, approximately 10 per cent of the total number of ETFs on ASX are smart beta. In the US, smart-beta products capture nearly a quarter of the market. We expect the use of ETFs in Australia will be at the same level as the US within five years.

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Reflecting the growing appeal of smart-beta ETFs, at least 50 per cent of Australian financial professionals are now using smart-beta strategies in portfolios, up from 37 per cent last year, according to VanEck's second annual smart beta survey.

Outperformance is the biggest attraction, followed by lower costs compared to actively managed funds.

Smart-beta ETFs are being used as a replacement for actively managed funds by 64 per cent of financial advisers and brokers, and an almost equal proportion are using smart beta to replace market-capitalisation-based index managed funds, the survey revealed.

An overwhelming 91 per cent of financial advisers and brokers believe smart-beta strategies will outperform or perform in line with active strategies.

Investors too are realising that smart-beta ETFs are good value and can constitute key portfolio components, hence the flood of money into this product class. They combine the best aspects of active and passive management by tracking indexes that deliver targeted investment outcomes.

Smart-beta ETFs retain the transparency, liquidity, ease, and rules-based approach of market-capitalisation based index ETFs, with the added advantage of being specifically designed for investment purposes.

Popular approaches include equal weighting or targeting factors such as quality and value. Factors are identifiable and persistent drivers of returns, which has been the subject of long-standing academic research.

Nearly three quarters of respondents investing in smart beta use two or three smart-beta strategies as they allow investors to target specific investment objectives, cost effectively.

While most respondents use smart-beta strategies for Australian equity and international equity exposure, smart-beta ETFs now allow investors to easily diversify into sectors which are not well represented on the ASX, such as technology.

In addition, with newer sophisticated offerings in other asset classes, such as fixed income, we expect usage within other investment categories to grow in the future.

VanEck's second annual smart-beta study was conducted in July 2017. The survey is based on the responses of over 150 Australian-based financial professionals working in an advisory capacity in Australia.

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Arian Neiron is the managing director of VanEck Australia. Established in 1955, VanEck is one of the world's largest ETF providers. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind.

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