Smart beta may be losing traction, according to research from global research and consulting firm Cerulli Associates.

The number of such products launched globally slowed year-on-year in 2018 and exchange-traded funds have failed to grow their marketshare in Europe over the past 12 months.

Cerulli finds that the pace of ETF new issuance is slowing globally. A 2019 Morningstar report notes that 132 new strategic beta exchange-traded products were brought to market in 2018, down from 257 in 2017.

Another important indicator that shows the smart beta revolution may be stalling is that Europe ETPs and ETFs account for only 7.5% of total assets, a ratio that has held steady for the past year, according to Morningstar. In addition, the European marketplace is dominated by one key issuer, iShares, which boasts a 45% share. State Street and UBS are a distant second and third respectively, followed by a long tail of issuers.

Another recent Cerulli report showed that in the U.S. only 21% of advisors use strategic beta products, which is a smaller portion than would be expected given the wide availability and product development focus.

“If smart beta is supposed to represent a radical disruptive influence on both asset management in general and ETF issuers specifically, the numbers suggest that the revolution may be stalling,” says Fabrizio Zumbo, associate director of European asset management research at Cerulli.

Cerulli believes it is important to take account of the fact that the smart beta space contains a wide variety of strategies and factors.

For instance, multi-factor ETFs and ETPs have recently been capturing the bulk of monthly net inflows, at $2.4 billion in January, according to data provider ETFGI. By contrast, dividend-factor ETFs and ETPs saw the greatest outflows during the month, at $657 million.

In addition, changes in investor sentiment are not necessarily reflected in actual market returns.

“The recent enthusiasm for low-volatility strategies, for example, seems slightly at odds with returns for the calendar year 2018,” Zumbo said in a statement. “S&P’s numbers suggest that in 2018, enhanced-value indices produced the biggest returns within the European universe of strategy indices, with a 9.5% return, whereas low volatility fell by 1.9%.”

A 10-year look at returns provides a more nuanced picture, according to Cerulli.

S&P Dow Jones data shows that quality and low-volatility strategies produced better-than-benchmark returns with lower risk levels, as measured by annualized volatility. Meanwhile, value emerges as a far more volatile strategy, with lower returns.

“Intriguingly, of the 11 factor families identified by S&P, all have produced higher returns, with five of the 11 boasting lower levels of volatility,” Zumbo said in a statement.

A study of the five key factors — value, momentum, low volatility, quality, and growth — in the U.S. stock market shows that, although returns generated by smart beta ETF indices are slightly lower than those for the benchmark, their performance is broadly in line with investors’ expectations.

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