A rough start to the year for more than $850 billion exchange-traded funds with quantitative strategies is fueling a product rethink.
Smart-beta stock ETFs — which use characteristics such as a company's value, size or momentum to direct investments — lured the least money in 12 months in the U.S., dragging asset growth below the five-year average for a second quarter, according to data compiled by Bloomberg. Instead of quitting, ETF providers are doubling down and trying to woo investors with all-in-one funds that pull together several factors.
Money managers have come to rely on smart-beta funds. As differentiated products, they can justify higher fees, offsetting lower revenue from broad-indexed funds — which are now virtually free. So factor investing is getting a reboot: Rather than teach investors how to pivot between products, issuers are creating multifactor funds that offer exposure to several return-enhancing characteristics. And that seems to be working.
"The multifactor funds really address the bulk of investors who want something there, but just don't know how to play it," said Paul Kim, the head of ETF strategy at Principal Financial Group Inc., which runs several of the funds. "That's where we're seeing the most client demand."