Complexity and Definitional Ambiguity Challenge Strategic Beta Adoption


Complexity and Definitional Ambiguity Challenge Strategic Beta Adoption
Less than one-quarter of advisors report using strategic beta products

March 2019, Boston—Strategic beta products offer advisors the opportunity to fine-tune investment exposures. However, they require increasing intellectual capital to select amid an abundance of options, according to recent
research from Cerulli Associates, a global research and consulting firm.

A key challenge for strategic beta strategies is the difficulty that advisors face in interpreting them. Cerulli believes that the increasing expertise required to understand the products, and key discrepancies in how they are positioned, hinder product use.

“Cerulli’s advisor survey indicates that only 21% of advisors report using strategic beta products—a smaller portion than would be expected given the wide availability and product development focus. It is likely that the ambiguity about
factors and what they are intended to accomplish is challenging strategic beta adoption,” explains Daniil Shapiro, associate director at Cerulli. “In examining how issuers position strategic beta exchange-traded funds (ETFs), Cerulli finds that 68% of issuers often present the products as providing specific factor exposures, while 50% state that they position
the ETFs as generating alpha. Advisors, meanwhile, report using strategic beta products based on their desire for key utcomes, particularly downside risk protection and reducing portfolio volatility.”

Almost three-quarters (71%) of advisors report that not knowing whether the strategies are meant to produce alpha
or outperform is a significant or moderate reason for not using them, while another 67% state the same about lack of
familiarity with the strategies. Cerulli notes that strategic beta ETFs, as indexed investments, are not alpha-generating, while using such products in concert may be alpha-generating but requires a highly skilled approach only available to the most proficient users.

Cerulli believes that increased innovation across strategic beta products, and particularly with respect to multifactor products, has led to a broad increase in complexity, which has, in turn, challenged advisor adoption. With performance varying widely between products, advisors will be hard-pressed to make a defensible investment decision.

“Cerulli recommends that advisors use strategic beta products to fine-tune investments in line with their clients’ goals (e.g., a size factor product for a client with a long-term horizon looking to take risk away from mega-cap products or a low-volatility ETF for a client wi education from an outcome perspective versus positioning individual products based on their potential to outperform,”
continues Shapiro.

These findings and more are from the March 2019 issue of The Cerulli Edge—U.S. Asset and Wealth Management Edition,which explores the benefits and drawbacks associated with strategic beta ETFs, annuity income riders, and co-investing in the current market environment.


Looking for more information? Contact Us.