Smart beta ETF strategies may attract IFAs: Moody’s

The five-page report, Promising Futures: Smart Beta Product Evolution Will Benefit Certain ETF Providers, states that managers whose franchises are centred around factor-based smart beta will benefit the most.

Smart beta uses a broader range of methods, such as equal weighting and weighting by dividends, to offer potentially higher value to investors than ‘simple’ smart beta strategies.

Stephen Tu, vice-president of the global credit rating company, said: “Invesco’s Powershares franchise, which offers smart beta ETFs, will benefit, as will Blackrock. Guggenheim may also benefit given the majority of its ETFs are based on non-traditional indexing.”

Compared with passive management, smart beta promises enhanced returns over cap-weighted benchmarks. Compared with active management, it offers potential returns over traditional indices at a lower cost with greater transparency.

Mr Tu, who authored the report, said: “Smart beta, or intelligent indexing, is an investment strategy that sits in between passive and active management. It attempts to deliver higher returns to investors by using an alternative form of indexing based on risk premia, such as dividend yields.”

Those asset managers who are active in the ETF market, but have a limited offering of basic smart beta products, will benefit the least. According to the study, their rate of growth is likely to be more muted and in line with the general market.

Smart beta is currently the fastest-growing sector within the ETF market, and grew at an impressive annual rate of 43 per cent in terms of combined assets under management of the top six players.

In October 2013, Towers Watson consultancy published a 12-page study, Understanding Smart Beta, on how investors were seeking alternative ways of passive investing. At the time, Duncan Glassey, principal of Edinburgh-based Wealthflow, said: “While I like using this sort of additional beta and think you can get a better return from it, I do get nervous when people develop sexy solutions and say this is the next best thing.”