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Smart Beta on the Rise

According to a recent survey conducted by FTSE Russell in early 2016 with large pools of assets, smart beta is on the rise.

The survey found that 72% of respondents are either using smart beta strategies or actively evaluating them, up from just 44% in 2015. All tiers of assets indicated strong use and interest in smart beta, but groups with less than $1 billion were particularly interested.

BlackRock estimates that the category will reach $1 trillion in 2020 and $2.4 trillion in 2025.

Firms like Columbia Threadneedle and Hartford Funds have bought smart beta managers, and Franklin Templeton recently launched smart beta ETFs, joining the ranks of John Hancock, Goldman Sachs and Fidelity. A separate FTSE Russell report estimates that 68% of FAs use smart beta ETFs, attracted by their performance.

But some experts are skeptical about using rules-based, rather than market cap, indices. Vanguard founder John Bogle calls them “silly marketing gimmicks”; Burton Malkiel claims that there are so many different strategies, it’s hard to consider smart beta a category.

No doubt the use of indexing, especially in DC plans, is gaining popularity — as is the use of ETFs as building blocks for professionally managed investments. Will smart beta capture a larger portion of this trend?

And could it do so at just the wrong time? Smart beta advocate Rob Arnott, the founder of Research Affiliates, wrote in a report published earlier this year that there is a “reasonable probability of a smart beta crash” — an outcome the report says is a consequence of what it termed “the soaring popularity of factor-tilt strategies.”

Arnott questions whether the returns from smart beta are sustainable, noting that, “Many of the most popular new factors and strategies have succeeded solely because they have become more and more expensive. Is the financial engineering community at risk of encouraging performance chasing, under the rubric of smart beta? If so, then smart beta is, well, not very smart.”

Opinions expressed are those of the author, and do not necessarily reflect the views of NAPA or its members.

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