There has been a “noticeable uptick” in the use of smart beta ETFs by sophisticated investors, according to Betashares.
The ETF provider found smart beta ETFs captured $6.6 billion in net flows during 2024, which represented 21 per cent of total ETF flows. This is up by 12 percentage points from 9 per cent of total flows in 2018.
Smart beta ETFs are described as those which combine the benefits of passively managed funds with the advantage of selecting investments based on certain formula-based rules, adding an active element.
The types of smart beta ETFs on offer include equal weighting, factor based, capping to ensure a small number of holdings don’t dominate a portfolio or are fundamentally weighted.
Speaking to Money Management, Tom Wickenden, investment strategist at Betashares, said the rise in flows is a “clear sign” that advisers are increasingly interested in the vehicles.
“The elevated flows represent a clear sign that advisers and investors are increasingly looking to these ETFs for access to more sophisticated investment strategies with the potential to produce alpha above the broader market.
“The uptake of using smart beta ETFs in portfolio construction is particularly noticeable among more sophisticated investors, who are increasingly adopting multi-asset portfolios that blend broad market, smart beta and active strategies working towards risk, return and fee budget. By taking greater control of their portfolio construction, these investors are able to optimise their exposures across various asset classes and factors and better aim to achieve their desired results.”
The annual flows compared to outflows of $734 million from actively managed ETFs, a 2 per cent decline on 2023 flows. According to Betashares data, actively managed ETFs have failed to record positive annual inflows since 2021.
“Active management is still part of the picture, but it is now reserved for areas where genuine alpha can be added – where an active manager can provide real value beyond what is already captured by passive and smart beta strategies,” Wickenden added.
At the end of 2024, VanEck’s annual Smart Beta Survey found 47 per cent of advisers are already using smart beta ETFs, and 21 per cent said they are currently evaluating them for potential usage. Only 4 per cent of advisers said they had already evaluated them and opted against their usage in portfolios.
Over half said they use them as a replacement for active management, and 47 per cent of advisers said they use them as a replacement for market capitalisation passive management. Some 65 per cent said they use them for international equities and 80 per cent for Australian equities.
