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Portfolio > ETFs

Most Advisors Use Smart Beta, Whether They Know It or Not: Russell

By Bernice Napach

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It’s no secret that smart beta ETFs are growing in popularity among financial advisors, but did you know that more advisors favor strategies that weight companies by historical dividend yields and high quality rather than equally, as commonly believed? Institutional asset owners, in contrast, favor low-volatility smart beta ETFs.

Those are just some of the illuminating findings from the FTSE Russell 2015 Smart Beta survey released Monday.

“Factor-based and alternatively weighted indexes have transformed the investment landscape,” said Rolf Agather, managing director of North America Research for FTSE Russell, in a statement today. “Retail financial advisors view smart beta as an important portfolio tool for addressing investment challenges.”

A recent Morningstar report found “explosive growth” in “strategic beta” ETPs, referring to smart beta exchange-traded products (ETFs are a large subset of ETPs). As of the 12 months ended June 30, strategic ETPs accounted for 31% of all new cash flows into U.S. ETPs and 21% of these assets ($450 billion), according to Morningstar.

The FTSE Russell survey found that more than two-thirds of the advisors surveyed were using smart beta products, but only 35% reported to have done so if they weren’t prompted by product descriptions or examples.

“Defining ‘smart beta’ and what is classified as smart beta, continues to be a point of confusion for financial advisors,” the report says. RIAs were the most familiar with the concept.

Seventy percent of advisors using smart beta use more than one approach. Strategies that combine more than one factor into a single strategy — combining low volatility, high quality and value, for example — show the most potential for future adoption by advisors, according to the report.

Advisors who use smart beta strategies tend to view smart beta as a form of active management. They tend to be younger, and have a higher share of assets under management invested in ETFs and practices that extend beyond investment selection, according to the survey,

Even though advisors under 49 accounted for just under half of survey respondents, at least 70% of them reported using smart beta strategies. (78% of advisors under age 40 used smart beta strategies.) In comparison, just 54% of respondents over 60 used smart beta strategies. They accounted for at least 11% of respondents and probably more (16% did not state their age).

Advisors cited downside protection in bad markets as the most popular reason for using smart beta strategies followed by lower volatility and increased alpha.

A total 307 advisors were surveyed. Participants were required to have AUM exceeding $20 million, a minimum 4% of assets invested in ETFs and 20% fee-based annual revenue.

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