Smart beta, which aims to straddle active and passive investment management, is the fastest growing segment of ETFs
The rising popularity of so-called “smart beta” exchange-traded funds (ETFs) will benefit firms with strong positions in the niche, such as Invesco and Blackrock, says Moody’s Investors Service in a new report.
Smart beta, which aims to straddle the active and passive approaches to investment management, is the fastest growing segment of ETFs, Moody’s notes. It says that smart beta ETFs grew by 43% in terms of combined assets under management of the top six players last year.
Moreover, it notes that NYSE Liffe recently launched a suite of smart beta futures based on MSCI factor indices. “Although smart beta represents only 19% of total ETF assets, the futures contract launch has strengthened the institutional credibility and acceptance of the investment strategy,” it says.
Smart beta promises enhanced returns compared with passive strategies that just follow cap-weighted benchmarks, and it is cheaper and more transparent than active management, the rating agency explains.
“Smart beta, or ‘intelligent indexing,’ is an investment strategy that resides in between passive and active management,” says Stephen Tu, vice president at Moody’s and the author of the report. “It attempts to deliver higher returns to investors by using an alternative form of indexing based on risk premia such as dividend yields.”
The firm notes that the smart beta trend is a credit positive for asset managers with ETF businesses focused on this area. “The expansion of smart beta will benefit asset managers with businesses centered around smart beta the most,” says Tu. “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.”