ETFs, Investments

Smart beta ETFs gain favour

smart beta ETF Van Eck Arian Neiron

Smart beta exchange traded funds have made significant inroads into the market share of actively managed offerings over the past year.

The latest research into exchange traded funds (ETF) has shown the use of smart beta offerings has increased noticeably in 2023 at the expense of actively managed products.

The annual VanEck Australian Smart Beta Survey revealed a 7 per cent increase the use of smart beta ETFs by advisers from 2022. To this end over 63 per cent of respondents indicated they have switched from active managers to those providing smart beta strategies. This compares to 56 per cent of participants providing this feedback last year.

The justification for this change in sentiment was that smart beta ETFs deliver improved performance, lower costs and better portfolio diversification.

VanEck Asia Pacific chief executive Arian Neiron pointed out the study as confirmation active management products are being disrupted.

“Smart beta ETFs are providing investors with targeted outcomes, full transparency, and low fees. Active managers can no longer afford to ignore the popularity or the features of smart beta ETFs,” Neiron noted.

“If we consider active ETFs as a proxy for active management, net flows into active products have been negative over the past two years. Since 2015, the number of active ETFs has grown from just six to 90. Despite this growth in product offerings by active managers on the Australian exchange, their popularity has been dwarfed by the uptake of passive ETFs, which includes smart beta.

“The proportion of net flows going into smart beta strategies rose to 31 per cent as at 31 August 2023, up from 26.2 per cent a year ago, with that gain outpacing both active and market capitalisation strategies. Smart beta strategies now make up 16.6 per cent of the total exchange traded product industry, up from 15.2 per cent the prior year, again outpacing growth in active and market capitalisation strategies,” he said.

The analysis also indicates the trend is likely to continue with 99 per cent of advisers using smart beta ETFs saying they are satisfied with them while the proportion of the cohort who feel they offer good value for money increased from 80 per cent to 88 per cent over the last 12 months.

Smart beta ETFs incorporate strategies with targeted outcomes that track indexes defined by more than just market capitalisation.

The VanEck Australian Smart Beta Survey collated responses from 673 financial adviser and stockbrokers.

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