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Advisors Say Smart Beta, Active Funds Will Boost ETF Growth

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A survey released Thursday by ETF.com and Brown Brothers Harriman finds that the U.S. exchange-traded fund market is likely to experience a surge of growth from smart beta and active funds as financial advisors look for excess returns.

At the same time, the market continues to add traditional passive vehicles, according to the study.

The annual poll gauged the market sentiment of 250 ETF-focused financial advisors.

“In the current U.S. investment environment, investors are seeking access to lower cost strategies that provide alpha, diversification and lower risk,” BBH’s global head of ETF services Shawn McNinch said in a statement. “As a result, ETF sponsors have continued to evolve their product sophistication by launching more smart beta, active and currency-hedged ETF products.”

Ninety-nine percent of advisors surveyed said they planned to maintain or increase their exposure to smart beta over the next year. In addition, advisors indicated a strong desire to see more alternative and fixed income ETFs.

Poll respondents said they were willing to consider active funds or ETFs with shorter track records, with only 20% saying they needed an active fund or ETF to have a track record of more than three years.

“2015 has been one of the most exciting years ever in terms of innovation, adoption and overall growth in the ETF market,” Matt Hougan, chief executive of ETF.com, said in the statement. 

He noted that the survey results showed that advisors were eager to adopt new, innovative ETFs.

(A recent report showed that of 37 ETFs launched in the U.S. in 2015 through September, 21 followed smart beta strategies and seven followed an active strategy.)

The poll found that 73% of advisors were making only between one and five trades in a client account per month, which puts greater importance on long-term holding costs, such as expense ratios, than on such trading costs as commissions and spreads.

Liquidity turned up as a concern among advisors, as recent market volatility has underscored the need to understand how ETFs react in certain market conditions.

Fifty-nine percent of respondents said they needed more education on ETF liquidity.

As to how they select ETF vehicles, 56% of advisors said the brand of the fund was more important than the brand of its underlying index.