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So-called smart-beta exchange-traded funds were at the head of the class in 2018.
The funds — those that track alternative, rule-based indexes instead of the traditional market-capitalisation-based ones — pulled in a net $75bn in assets in 2018. They accounted for half of the inflows into US equity ETFs, according to Deutsche Bank ’s annual review, released last week.
Although the absolute net flow of money to smart-beta ETFs was a little lower than in 2017 — likely because markets were so volatile in 2018 — their share of total flows reached a three-year high. That indicates investors still have a strong appetite for alternatives to cap-weighted funds such as the SPDR S&P 500 ETF.
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The majority of the money pouring into smart-beta ETFs went to the more established factor funds: those that select stocks based on certain favorable characteristics. Within the factor group, value funds were the most popular, accumulating $23bn in total assets last year. Growth and dividend funds followed, with $14bn and $13bn, respectively.
Those three types alone made up two thirds of all flows into smart-beta funds.
Preferences shifted over the course of the year. “Investors began 2018 with high growth expectations as evidenced by $2bn inflow to Growth funds and a proportional amount out of value funds,” wrote Deutsche Bank analyst Ari Rajendra.
“As the year progressed, Value funds regained investor interest amid slowing economic indicators, sector idiosyncratic risks and rising volatility.”
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Rajendra noted that in the fourth quarter, when the stock market plunged, investors allocated a net $14bn to value funds, much higher than the net $3bn they put into growth funds.
As uncertainty increased, people were also increasingly looking for defensive investments and assets producing lots of income as protection. Demand for dividend-oriented funds was high, according to the report.
“This suggests to us the search for income persists amid a regime change in both US rates and market volatility,” wrote Rajendra.
Competition among smart-beta funds is getting tougher as more such ETFs become available, making it harder for companies that put the funds together to find shelf space. The number of new funds peaked in 2015, at 194; only 119 were launched last year.
Write to Evie Liu at evie.liu@barrons.com
This article was published by Barron’s
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