“The Evolution of Smart Beta ETFs,” which was commissioned by Invesco PowerShares Capital Management LLC, a provider of domestic and international ETFs, finds that one in four institutional investors use smart beta ETFs and that adoption among non-users is likely to accelerate in the near future.
Results of the study also reveal that nearly half (46%) of institutional decisionmakers not currently using smart beta ETFs indicate they are likely to start using the products over the next three years, particularly institutional investors with assets in excess of $500 million.
Within the smart beta ETF category, low volatility funds experienced the greatest growth in 2013, a 99% increase in assets. This trend is expected to continue, say the study authors, as two-thirds (67%) of institutional decisionmakers not currently using smart beta ETFs indicate they are most likely to use low volatility funds moving forward. In addition to low-volatility products, nearly half (46%) of non-smart beta ETF users anticipate using high dividend ETFs and just over one-third (34%) plan on using fundamentally weighted investment strategies.
“We have been seeing increased interest in smart beta ETFs with various institutional segments, and the research findings confirm that increasingly institutions are implementing smart beta ETFs,” says John Hoffman, Invesco PowerShares director of ETF institutional sales and capital markets, based in Chicago. “Smart beta ETFs make a lot of sense for institutional investors seeking lower costs, intraday liquidity, increased transparency, ease of implementation, and strategies that go beyond market cap weighting.”
Non-users indicate that the primary drivers of future usage include making tactical adjustments to asset allocation (42%), accessing higher beta strategies (40%) and portfolio completion (40%). In addition, 39% of non-users plan to use smart beta ETFS to reduce portfolio volatility (see “Smart Beta ETFs Can Be Used to Reduce Volatility”).
“We educate both users and non-users about the many benefits of PowerShares smart beta ETFs, and these results reinforce our belief that these products are great investment tools for institutional asset managers as well as retail investors,” says Dan Draper, Invesco PowerShares managing director of global ETFs. “We’re very excited about the future potential of our investment category.”
Data for the study was collected from 193 participants between September 5 and October 2, 2013. An online survey was administered by Cogent Research (on behalf of Invesco PowerShares) to institutional decisionmakers including pensions, endowments/foundations, nonprofit institutions and mutual funds, as well as registered investment advisers who manage institutional assets. Respondents were not made aware of Invesco PowerShares’ involvement in this research initiative.
More information about the study can be found here.