Smart beta is a strategy increasingly evaluated in today’s investment landscape. At times coined “alternative beta,” “strategic beta” or “intelligent beta,” the investment approach is still a relatively new phenomenon for investors and one that many are still trying to understand. Despite their limited history, smart beta solutions increasingly are finding their way into investors’ portfolios. As smart beta continues to gain momentum, particularly in the institutional market, now is the time for investors to get smart on smart beta.
In the simplest terms, smart beta is founded on alternative weighting methodologies such as low volatility, high-dividend, fundamentally weighted, equal weight, high beta and enhanced fixed-income funds. Smart beta exchange-traded funds track indexes based on these alternative weighting methods, which in the past have delivered favorable risk-adjusted returns and varying returns across different market regimes. Today, there are more than 350 smart beta ETFs available in the U.S. holding more than $230 billion in assets under management — a number that is rapidly growing.
According to a new study, "The Evolution of Smart Beta," conducted by Invesco PowerShares and Market Strategies International, more than one-third of institutional investors that are using ETFs are now also using smart beta ETFs, up 24% from last year. Additionally, smart beta ETFs saw the highest year-over-year increase in institutional usage from 2013 to 2014.
The study highlights that the investment strategy is also standing on the success of a larger ETF revolution, where investors added more than $240 billion to U.S.-listed ETFs in 2014 alone, bringing the overall AUM to nearly $2 trillion.