Smart beta ETFs that passively track customized indexing methodologies beyond traditional market-capitalization weights have steadily grown in popularity over the years with over half of large institutional users now invested.
According to the FTSE Russell’s 6th annual global institutional asset owner smart beta survey, 58% of institutional investors surveyed have implemented smart beta strategies, or up 10% year-over-year, with adoption of these strategies rising to 60% in North America, up 18% from 2018 to 2019.
“Risk reduction, return enhancement and improved diversification continue to drive smart beta adoption among institutional investors globally. Within smart beta, multi-factor index-based strategies have undoubtedly been the market’s favoured choice, with uptake more than tripling since 2015. We expect sustained growth in smart beta, especially when it comes to multi-factor combination strategies,” Rolf Agather, Managing Director, Research & innovation, FTSE Russell said in a note.
Multi-factor strategy usage was the most popular avenue for smart beta exposure, increasing to 71% globally this year, or up 22%.
FTSE Russell also conducted their inaugural report on ESG integration into smart beta strategies, along side its broader smart beta survey, and found that among asset owners with assets under management of greater than $10 billion, 58% expect to increase their allocation to smart beta and ESG. ESG refers to environmental, social and governance principles.
Specifically, those institutional investors surveyed revealed a breakdown for governance 74%, carbon 66% and social 64% as the key issues for those who anticipate adding ESG considerations to their smart beta strategies.
European investors remained more open to ESG investments, with 77% of European respondents expressing interest in applying ESG considerations into smart beta allocation, or up 22% from 2018.
“Integrating or looking to integrate ESG into smart beta strategies is rapidly becoming the norm, especially in Europe, where over three-quarters of asset owners have already applied or intend to apply ESG into smart beta allocations. We call this integration ‘Smart Sustainability’ and these trends are reflected in our experience of working with clients in new smart beta mandates,” David Harris, Head of Sustainable Investing, FTSE Russell said in a note.
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