These days, investors want their ETFs to do a lot more than they used to. In a space dominated by cheap and liquid index-tracking funds, products that offer investors an additional active or factor-based twist are drawing record inflows. That’s according to the latest data from London-based ETFGI, which tracks ETF inflows and outflows.

Let’s start with the continuing (and fast!) increase in assets allocated to smart beta products. During the month of October, smart beta equity ETFs drew in US$3.0 billion in new assets, taking the total for 2015 up to $53.7 billion for the first 10 months of the year. Investors are increasingly looking to slice and dice the broad index by zoning in on factors that could potentially enhance returns or smooth out volatility.

In all, there were 764 smart beta equity ETFs in October, with 1,336 listings and assets of US$399 billion. Much of that is dedicated to indexes that track fundamental factors like dividend yield, earnings per share, revenue and other accounting metrics—$286.6 billion follow these. Investors will also find ETFs covering multiple factors like volatility and momentum or alternative weightings (getting beyond market cap)—in all, $26.8 billion in assets follow these indexes.

Among smart beta-only indexes, investors clearly have their preferences. Those using an alternative weighting methodology account for $22.7 billion, products with volatility screens (including low volatility) now have $26.5 billion in assets, and momentum strategies sit at $10.6 billion.

It’s still a drop in the bucket compared to market cap equity ETFs (they account for $1.79 trillion). But, according to ETFGI, smart beta equity products are growing significantly faster at 39.3% versus 18.6% for market cap-based products.

Getting active

If investors are pouring into smart beta, they’re also embracing active ETFs, another relatively new player on the ETF stage. According to ETFGI, assets invested in active ETFs hit $32.9 billion in October, marking a new record. Active ETFs have pulled in $8.9 billion in new inflows over the year—a 23% increase over the prior record set in 2013.

Globally, there are 232 ETFs, with 322 listings and total assets of US$32.9 billion. But they account for only 1.1% of the global $3-trillion ETF market. By far, the biggest appetite for active ETFs is in the U.S. (66%), followed by Europe (19%) and Canada (12%). Investors in active ETFs show a preference for bond ETFs—they account for 73% of total assets versus 18% for equities. On the index ETF side, the opposite is true—investors show a preference for equity-based products—77% of ETF assets are equity exposures versus 16% for bonds.

Look for more changes and more exposure to active ETFs in the future as more products hit the market. As ETFGI reports, more than 80 applications have been filed with the U.S. Securities and Exchange Commission (SEC) since 2007, and there are now 31 issuers offering them. A lot of managers are waiting to see if the SEC ultimately allows for non-transparent active ETFs. This could make or break the future of the active ETF trend.

 

 

 

 

 

Copyright © 2017 Transcontinental Media G.P. Originally published on benefitscanada.com

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