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European investors make switch to smart beta

While European market capitalisation ETFs suffered net outflows of $9.1bn in the first half of this year, smart beta and alternatively weighted strategies had net inflows of $5.7bn.

Deborah Fuhr, managing partner of ETF data provider ETFGI which produced separate data on global smart beta ETF flows, said the Brexit vote was one of the reasons for the popularity of smart beta products, as it had led to an increase in volatility.

“Markets and investors around the world were engulfed in the chaos following what many saw as the unexpected result of the UK’s June 23rd vote. Volatility was up significantly during the month. The S&P 500 index was up just 0.3%,” she said. Year-to-date (to 30 June), volatility factors indeed gathered the largest net inflows globally with $14.3bn.

Fuhr in fact predicted correctly at the start of the year that smart beta inflows would rise at the expense of market capitalisation ETFs because of the deteriorating beta returns to be had from (developed market) equities. “Therefore smart beta ETFs are the main growth area going forward,” she said in January.  

During the month of June alone, smart beta products globally had net inflows of $5.70bn. Volatility factors gathered the largest net inflows with $2.17bn, followed by dividend factor-based products with $1.7bn and value factor with $1.6bn.

In terms of asset management firms, year-to-date, iShares smart beta ETF/ETP net inflows were the largest ($19bn), followed by Vanguard ($5.26bn) and Charles Schwab Investment Management ($2.15bn).

Although the big name asset managers are involved in smart beta products, the field is not dominated by them, Fuhr said.

“Blackrock, State Street and Vanguard hold 70% of global ETF assets. But the smart beta space is not owned by those firms and a lot of new issuers are coming to market. Many asset managers and quant teams are developing their own smart beta using quant techniques.”

ERI Scientific Beta is one of those niche firms active in Europe. Some $10.3bn of assets currently track their customised smart beta strategies. The relatively high fees providers ask for smart beta funds compared to market capitalisation ETFs still put off many wholesale investors. To soothe these concerns, ERI announced this spring that it would give investors the option not to pay fixed fees any longer. Instead, they would have to pay a 20% fee on all outperformance generated by ERI’s indices.  

Part of the Mark Allen Group.