The Opportunity in Smart-Beta ETFs

Transcription

1 The Opportunity in Smart-Beta ETFs Why smart-beta ETFs present growth potential for both active and passive asset managers, and what executives need to know about distributing them through advisors. August 2016 Ignites Research reports are sold on an individual or annual subscription basis. For pricing information, please contact Ben Northover at (212) or at

2 Table of Contents Executive Summary 3 Methodology 4 Key Takeaways From the Report 5 Chapter 1: The Competitive Position of Smart-Beta ETFs 7 How Much Do Advisors Use Smart-Beta ETFs? 9 Chapter 2: How Advisors Employ Smart-Beta ETFs 14 Chapter 3: Future Trends in Smart-Beta ETFs 18 Considerations When Launching Smart-Beta ETFs 22 Chapter 4: Standing Out Amid More Competition 26 Top-Rated Providers of Smart-Beta ETFs 28 Main Recommendations for Action From the Report 33 Table of Illustrations Figure 1: Assets in Smart-Beta ETFs ($ Billion) 7 Figure 2: Pct. of Advisors Using Smart-Beta ETFs 9 Figure 3: Advisors Use of Smart-Beta ETFs vs. Any ETFs 9 Figure 4: Smart-Beta ETF AUM by Advisor Channel 10 Figure 5: Breakdown of Advisors AUM in Smart-Beta ETFs 11 Figure 6: Smart-Beta ETFs Fit in Investors Portfolios 14 Figure 7: Top 10 Smart-Beta ETF Strategies, Advisors vs. Wholesalers 15 Figure 8: Top 10 Asset Classes in Smart-Beta ETFs, Advisors vs. Wholesalers 16 Figure 9: Pct. of Advisors Planning to Boost Allocations to Smart-Beta ETFs 18 Figure 10: Advisors Most Likely to Boost AUM in Smart-Beta ETFs 19 Figure 11: Usage Plans of Advisors Not Currently Employing Smart-Beta ETFs 20 Figure 12: Investment Products Seen Losing Market Share to Smart-Beta ETFs 21 Figure 13: Top Smart-Beta Strategies in Which Advisors Expect to Increase Assets 23 Figure 14: How Advisors View Expense Ratios for Smart-Beta ETFs 24 Figure 15: Challenges of Positioning and Using Smart-Beta ETFs 26 Figure 16: How Smart-Beta ETF Providers Stand Out Among Advisors 27 Figure 17: Advisors Pick of Top Smart-Beta ETF Providers for Overall Excellence 28 Figure 18: Advisors Top Picks for Cost, Performance, Advisor Support 29 Figure 19: Top 10 Manager Efforts That Influence Use of Smart-Beta ETFs 31 2 The Opportunity in Smart-Beta ETFs August 2016

3 Executive Summary Smart beta (also known as strategic beta, factor-based indexing and other names) has become one of the hottest concepts in asset management and has sparked a proliferation of products especially among ETFs. As of mid-2016, the U.S. market featured over $460 billion in assets invested in more than 600 smart-beta ETFs, according to Morningstar. The simplicity of the concept is part of its appeal: tracking indexes that aren t tied to traditional market capitalization-weighted indexes, thereby taking a rules-based approach to gain exposure to a single factor, multiple factors, or even a strategy. Beyond the potential to generate less-correlated or even superior returns, asset management firms find smart-beta ETFs alluring because they blur the line between active and passive management. Thus, they represent a newer market with more upside potential. Of the 740 financial advisors we surveyed across broker-dealer and RIA channels, 35% are currently using smart-beta ETFs a notably lower percentage than those using traditional ETFs, which suggests plenty of room to grow. Our expectation for growth is based on the fact that once advisors start using smart-beta ETFs they re very likely to boost allocations to them. Among the smart-beta ETF users we surveyed, 78% of them plan to increase their overall AUM in smart-beta strategies over the next three years. Of the 78% planning an increase, 14% of advisors are considering increasing their overall AUM in smart-beta ETFs by 11% or more. Extrapolating those dollars to the broader advisor universe suggests more than $100 billion in net new flows to smart-beta ETFs over the next three years even if no new advisors start using them. The payoff can be big for purveyors of active management because smart-beta ETFs can command significantly higher fees than traditional ETFs. Already a number of fund firms that typically eschew passive products have drawn on their active expertise to enter the smart-beta ETF market. As additional firms add to an increasing number of smart-beta ETFs, it becomes more important to understand how advisors are deploying these products and where there are genuine openings in the market. To help asset managers navigate the smart-beta ETF opportunity, this report addresses four main questions: 1. What is the current status of smart-beta ETFs and their utilization by advisors? 2. How are financial advisors using smart-beta ETFs? 3. Where will growth come from in smart-beta ETFs, and what types of products are on tap? 4. Which strategies and traits distinguish these products in an increasingly crowded market? Matthew Van Wagenen, Loren Fox and Rita Raagas De Ramos, report co-authors 3 The Opportunity in Smart-Beta ETFs August 2016

4 Methodology This report is based on proprietary surveys of five main audiences conducted by Ignites Distribution Research: 1. We surveyed the Financial Times 400 Top Broker-Dealer Advisors, a list of top brokerdealer advisors from across the U.S. from wirehouses and independent and regional BDs. The average FT 400 advisor manages $1.7 billion in client assets and has 25 years of experience. The FT 400 members applied for inclusion in the list, which was published in the Financial Times; Ignites Distribution Research conducted the ranking. We surveyed 240 FT 400 advisors in June We surveyed the Financial Times 300 Top Registered Investment Advisors, a list of elite, independent RIA firms from across the U.S. with average AUM of $2.8 billion per firm. The FT 300 members applied for inclusion in the list, which was published in the Financial Times; Ignites Distribution Research conducted the ranking. We surveyed 179 FT 300 advisors in June We surveyed 240 midsize financial advisors in the broker-dealer and RIA channels. These advisors, surveyed in June 2016, average $300 million in assets under management. 4. We surveyed 31 external wholesalers of smart-beta ETFs from 22 different asset managers in May-June 2016; they average 12 years of experience as externals. 5. We surveyed heads of product development and management at 13 asset management firms in May-June 2016, representing $900 billion in long-term assets in mutual funds and ETFs Money-Media Inc. All Rights Reserved. Reproduction and distribution of this publication in any form without prior written permission is forbidden. 4 The Opportunity in Smart-Beta ETFs August 2016

5 Ignites Distribution Research is dedicated to helping asset managers build and strengthen their relationships with financial advisors. Using proprietary surveys, interviews, and analysis of third-party data, our specialized reports provide a 360-degree view of a key topic in the industry, yielding valuable insight and actionable recommendations. Core topics of coverage include: Wholesaling National Accounts Marketing Distribution Channels Advisor Behavior & Segmentation Product Strategy Clients include: Ameriprise Financial Broadridge Financial Solutions Delaware Investments Fidelity Invesco Morgan Stanley OppenheimerFunds T. Rowe Price Vanguard And many others For information on subscriptions or single-report purchase, please contact Ben Northover at BenN@Ignites.com or Personnel Loren Fox is Director of Research at Ignites Research. He had been a senior research analyst at Strategic Insight. Prior to that Loren was a journalist, working at Institutional Investor and elsewhere. He earned his BA from Johns Hopkins University and MS from Columbia University. Contact Loren at lfox@money-media.com Rita Raagas De Ramos is US Research Manager at Ignites Research, where she is part of the Distribution and Retirement services. She was previously the Managing Editor of Ignites Asia, and before that worked at Dow Jones Newswires, UPI, and elsewhere. She earned a BS from the University of the Philippines. Contact Rita at rderamos@money-media.com Matthew Van Wagenen is a Research Analyst at Ignites Research, where he helps probe retail distribution and DCIO issues. He was previously a senior analyst at Corporate Insight, researching the US brokerage industry; he has also worked in public relations. Matt earned his BS from Seton Hall University. Contact Matthew at mvanwagenen@money-media.com Michael Ferraro is the Operations Manager at Ignites Research, where he oversees the major processes and systems. Previously, he was the Manager of Direct marketing for MandateWire, Pensions Expert, DPN and Ignites Research. Michael currently holds a BS from York College of Pennsylvania and an MBA from Dowling College. Contact Mike at mferraro@money-media.com 5 The Opportunity in Smart-Beta ETFs August 2016