Smart Beta: It’s Turning Up Everywhere

by: , Chief Investment Officer and Managing Director | IndexIQ

“Smart beta” or “factor-based” ETFs are turning up in more and more places. The strategies vary widely – from equally weighting stocks to identifying momentum in different corners of the bond market, to name a few – but, what makes them interesting to investors is the ability to add exposure to a factor or set of factors in a portfolio.

As with any investment strategy, understanding how it fits in a portfolio is vital. With smart beta, that means knowing the factor or factors that are optimized in an ETF’s underlying index, and understanding how an ETF built on these factors will interact with other elements in an investment strategy. Does an ETF built on bond market momentum replace or augment other fixed-income holdings? How will a low-volatility position impact overall returns across a market cycle?

Investors and advisors are looking closely at these questions, even as more and more smart beta strategies become available. Investor interest is certainly there. Last year, single- and multi-factor ETFs attracted more than $8 billion in assets globally, according to a recent story in Pensions & Investments.1 Total assets in these funds (including Exchange-Traded Products (ETPs)) hit nearly $560 billion globally by the end of February 2017, including nearly $500 billion in the U.S. alone, according to the research firm, ETFGI.2

ETFs like these are finding their way into more and more institutional portfolios. Roughly 65% of U.S. pension funds, including corporate pensions, public pensions, foundations, and endowments surveyed by Greenwich Associates, have already been buying and holding ETFs for two years or longer.3 The trend is just as pronounced overseas, particularly in Europe, where a growing number of institutions is adding exposure to factor-based ETFs.

Hedge funds, which have long used ETFs to express specific market or asset class views, are also getting on board with smart beta. At present, hundreds of hedge funds are holding smart beta ETFs in their portfolios, a number that is likely to grow.4

Today, there are hundreds of smart beta/factor-based strategies available to investors. Some represent relatively minor tweaks to existing broad-based indexes, while others are more narrowly tailored to capture return from a specific geography, investing style, or asset class. As with any innovation, a great deal of education will be needed to help all different types of investors understand just how these different factors function and which approaches might be appropriate for them.

But, this isn’t really about a handful of approaches being “best” or “right.” It’s about understanding what’s on offer and using the best available tools to find solutions and construct portfolios to meet investors’ goals. If the rapid rise of these funds is any indication, it’s clear that everyone from financial advisors to pension plan sponsors has found them to be useful. Advisors and their investors should take time to assess the role smart beta can play in their portfolios as well.


1. Source: Baker, Sophie, “Smart Beta ETFs Gaining Traction,” Pensions & Investments, 7/17/16.
2. Source: “ETFGI reports assets invested in smart beta equity ETFs/ETPs listed globally reached a new record high of 560 billion US dollars at the end of February 2017,” ETFGI press release, 3/22/17.
3. Source: “Institutional Investment in ETFs: Versatility fuels growth,” Refer to Greenwich Associates 2015 U.S. Exchange Funds Study, as seen in Greenwich Associates LLC, Q1 2016, p.7.
4. Source: via FactSet, Murphy, Cinthia, “How investors are using smart-beta ETFs,” ETF Report, 6/17.

About risk:

All investments are subject to risk and will fluctuate in value. Alternative investments are speculative, entail substantial risk, and are not suitable for all clients. Alternative investments are intended for experienced and sophisticated investors who are willing to bear the high economic risks of the investment. Investments in absolute return strategies are not intended to outperform stocks and bonds during strong market rallies. Hedge funds and hedge fund of funds can be highly volatile, carry substantial fees, and involve complex tax structures. Investments in these types of funds involve a high degree of risk, including loss of entire capital. Treasurys are backed by the full faith and credit of the federal government as to the timely payment of principal and interest.

Smart beta defines a set of investment strategies that emphasize the use of alternative index construction rules to traditional market capitalization based indices.

The information and opinions contained herein are for general information use only. IndexIQ does not guarantee their accuracy or completeness, nor does IndexIQ assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are as of the date of this report, are subject to change without notice. Past performance is no guarantee of future results.
MainStay Investments® is a registered service mark and name under which New York Life Investment Management LLC does business. MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. IndexIQ® is an indirect wholly owned subsidiary of New York Life Investment Management Holdings LLC. ALPS Distributors, Inc. (ALPS) is the principal underwriter of the ETFs. NYLIFE Distributors LLC is a distributor of the ETFs and the principal underwriter of the mutual fund. NYLIFE Distributors LLC is located at 30 Hudson Street Jersey City, New Jersey 07302. ALPS Distributors, Inc. is not affiliated with NYLIFE Distributors LLC. NYLIFE Distributors LLC is Member FINRA/SIPC.


Salvatore J. Bruno

Chief Investment Officer and Managing Director | IndexIQ

Sal is Chief Investment Officer at IndexIQ, where his primary responsibility includes developing and maintaining the firm’s investment strategies. Sal joined IndexIQ in 2007 from Deutsche Asset Management (DeAM) where he held a number of senior positions

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