Robo-advisers and innovations driving the rise of ETFs

The consistency of returns and style exposure is an important aspect of why these ETFs can be seen as an efficient replacement for traditional active solutions. In Europe, Smart Beta ETF AUM has risen from €6bn in 2011 to €30bn at the end of 2015. 

Smart beta ETFs follow rules-based quantitative strategies and, in some cases, these strategies can have a live track record of more than ten years. This is a rare and important feature. The value of a live record is well recognised by investors, especially in the context of strategies that can be used to replace active managers.

Article continues after advert

As advisers have become increasingly comfortable with the underlying methodologies employed in smart beta ETFs, so they have become more willing to recommend them to clients and incorporate them into multi-asset portfolios.

There is little to suggest that this trend should change as smart beta and products continue to evolve to focus on strategies such as the core factors of value, growth, quality, yield, small cap, liquidity and momentum.

Smart beta has fundamentally changed the investment landscape and opportunity set of advisers and their end clients. The added value ensures the products will remain relevant as markets develop and change.

One aspect of the financial crisis of 2008 was that while active managers typically underperformed there was also little value in being in a market capitalisation benchmark product that may decline by 50 per cent. This type of end result has created the demand for products that are more suited for long-term investment outcomes and opportunities.

Enhanced index methodologies that typically underlie smart beta ETFs are not only available in equities, but have also spread out to areas such as commodities. In this asset class, where the cost of owning commodities can have a deleterious impact on returns, smart beta strategies that look to minimise the cost of ownership can deliver fundamentally different returns.

Broad enhanced commodity strategies have both low volatility and low correlation to other asset classes, thereby ensuring a place in client portfolios through the benefit of diversification and risk management.

Portfolios of ETFs represent the way forward for many advisers in an ever-changing investment landscape. ETFs offer one of the most transparent and low cost investment vehicles while smart beta strategies deliver differentiated products that address key investment challenges.

In the UK the last remaining barrier to adoption of smart beta ETFs is one of product access on the platforms typically used by financial advisers. However, the twin drivers of platform consolidation and demand-led change are ensuring that ETFs are visible and playing an increasingly important role in building portfolios.