A new survey published by FTSE Russell, one of the largest providers of indexes for use by issuers of exchange traded funds, indicates adoption of smart beta ETFs, those funds using weighting schemes beyond market capitalization, is reaching new heights.
The index provider's sixth annual survey of global institutional investors' attitudes toward smart beta, or alternatively-weighted ETFs indicates adoption rates of these strategies reached 58 percent earlier this year, up 10 percent from 2018.
"Notably, in 2019 nearly eight in 10 (78%) asset owners have implemented, are evaluating or plan to evaluate a smart beta index-based strategy," said FTSE Russell. "In addition, adoption rates increased in Europe, North America and the Asia Pacific region, with growth also recorded in all AUM tiers: less than $1 billion, between $1-10 billion and more than $10 billion."
Among the factors contributing to institutional investors' adoption of smart beta ETFs are risk reduction, the potential for higher returns and the ability to bolster portfolio diversification. FTSE Russell also notes multi-factor funds are expected to be drivers of smart beta growth going forward.
Data from FTSE Russell also confirm institutional investors continue warming to environmental, social and governance (ESG) investment strategies. While the universe of related ETFs is growing in the U.S., investors' enthusiasm for such products is more pronounced in Europe.
"Among European asset owners evaluating or using smart beta, those expecting to apply ESG considerations to a smart beta strategy increased from 55% in 2018 to 77% in 2019," said FTSE Russell. "Adoption of ESG considerations into smart beta strategies remained flat in North America, with lack of stakeholder demand cited by respondents as the main reason for lack of growth in this area."
Among U.S.-listed ESG ETFs, FTSE Russell provides indexes for the Vanguard ESG U.S. Stock ETF (CBOE:ESGV) and Vanguard ESG International Stock ETF (CBOE:VSGX), among others. Those Vanguard products, which debuted last September, have almost $680 million in combined assets under management.
Issuers of smart beta ETFs should be heartened to know the FTSE Russell survey indicates barriers to entry to products are declining among institutional investors.
"This suggests that asset owners are becoming more comfortable with smart beta strategies, as many investors have developed an increased understanding of these products and have more confidence in their longer track records," said the index provider. "These were cited as the top two reasons many asset owners are re-evaluating smart beta strategies."
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