Exchange-traded funds had a big year in 2014, but the real stand out products with institutional investors were those based on an alternatively weighted index, or “smart beta," according to a new study by Invesco PowerShares Capital Management.
In the second annual Evolution of Smart Beta ETFs report, Invesco, which operates more than 140 ETFs, said the use of smart beta ETFs among pension funds, endowments, and institutional registered investment advisors increased from 24 percent in 2013 to 36 percent in 2014. Nearly two-thirds of these institutional investors planned to increase their use of smart beta ETFs over the next three years, more than any other ETF category.
Those surveyed named mitigating volatility, managing performance, accessing specific markets and making tactical adjustments to assets allocations as the leading factors reasons for investing in smart beta ETFs.
The most popular smart beta ETFs were high dividend and fundamentally weighted products, but Invesco expects low volatility ETFs to soon overtake them. The company said it also saw more than $500 million flow into enhanced fixed income ETFs, signaling it could be the next major area of growth.
“Given current concerns around fixed income risk in the current interest rate environment, it’s not surprising that 32 [percent] of institutions use enhanced income ETFs, and 43 [percent] expect to use them over the next three years,” Invesco said in a statement.
Not everyone is sold on the idea of smart beta. Firms like Vanguard and Wealthfront have been public with their opposition to smart beta strategies, arguing that they are high cost and tax inefficient relative to traditional index funds.
Overall, 2014 was a record-breaking year for ETFs in general. According to Invesco’s research, investors added $240 billion to U.S.-listed ETFs over the last year.