The Smart Beta Revolution May be Stalling


The Smart Beta Revolution May be Stalling

Despite slowing pace of issuance, performance is still broadly in line with investors’ expectations

April 2019, LONDON - Smart beta may be losing traction, according to the latest issue of The Cerulli Edge—European Monthly Product Trends Edition.The number of such products launched globally slowed year-on-year in 2018 and exchange-traded funds (ETFs) have failed to grow their marketshare in Europe over the past 12 months.

“If smart beta is supposed to represent a radical disruptive influence on both asset management in general and ETF issuers specifically, the numbers suggest that the revolution may be stalling,” says Fabrizio Zumbo, associate director, European asset management research at Cerulli Associates, a global research and consulting firm.

Cerulli believes it is important to take account of the fact that the smart beta space contains a wide variety of strategies and factors. In addition, changes in investor sentiment are not necessarily reflected in actual market returns.
“The recent enthusiasm for low-volatility strategies, for example, seems slightly at odds with returns for the calendar year 2018,” says Zumbo. “S&P’s numbers suggest that in 2018, enhanced-value indices produced the biggest returns within the European universe of strategy indices, with a 9.5% return, whereas low volatility fell by 1.9%.”

A 10-year look at returns provides a more nuanced picture. According to S&P, quality and low-volatility strategies produced better-than-benchmark returns with lower risk levels (as measured by annualized volatility). Value (enhanced), emerges as a far more volatile strategy, with lower returns. “Intriguingly, of the 11 factor families identified by S&P, all have produced higher returns, with five of the 11 boasting lower levels of volatility,” says Zumbo.

A study of the five key factors—value, momentum, low volatility, quality, and growth—in the U.S. stock market shows that, although returns generated by smart beta ETF indices are slightly lower than those for the benchmark, their performance is broadly in line with investors’ expectations.

“Another plus for European smart beta ETFs is that the expense ratios charged by most are far more competitive than those of their actively managed peers,” says Zumbo. “Crucially, smart beta ETFs’ expenses compare well with those of plain vanilla index trackers.”


• Bond funds have been the clear winners so far in 2019, with a sharp reversal in investor sentiment resulting in net new flows of €11.6 billion (US$13.1 billion). Cerulli notes that global currency bond funds, which posted net outflows of €5.5 billion in 2018, have attracted €10.6 billion so far this year. And the emerging market bond segment gathered €7.2 billion in the first two months of 2019, more than double 2018’s net inflows of €3.5 billion.
• The Italian fund industry gathered just €593 million of net inflows in February, down from the previous month’s €2.1 billion of net sales. Bond funds registered €1.0 billion of net inflows in February, making it the best-performing asset class. In the fixed-income space, bonds that target maturity as the best-selling sector, gathering €637 million of net inflows.
• The cross-border market suffered net outflows of €21.7 billion during February, mainly from money market funds (€16.5 billion), equity funds (€5.8 billion), and mixed-asset funds (€3.3 billion). Active equity funds have posted net outflows of €11.5 billion so far this year.

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