With 40 per cent of advice practices looking to increase their ETF usage, the next frontier being embraced is smart beta ETFs, providers have said.
Financial advisers have been driving growth in ETFs recently through their incorporation in investment portfolios and managed accounts. Advisory flows in the first half of 2025 were estimated to represent at least two-thirds of the $21.3 billion total flows seen in the six-month period, according to Global X, while Adviser Ratings has found 40 per cent of advisers expect to increase their usage.
With usage of passive and active ETFs becoming pretty mainstream, the next products being considered are smart beta ones, providers have said. According to Global X, these now capture roughly a quarter of all equity ETF net flows, up from just 16 per cent five years ago.
Smart beta ETFs combine active and passive elements to track a rules-based factor index focusing on factors like momentum, value and quality to achieve excess returns relative to market cap weighted indices.
In July, flows smart beta products stood at $1.1 billion, said VanEck, which is more than double the previous months where monthly flows ranged an average of $500 million.
Smart beta ETF flows
Source: VanEck, July 2025
Commenting on the marked increase in July, VanEck chief executive Arian Neiron said: “We saw an uptick across several funds, most notably our equal-weight Australian equities ETF, which increased 837.5 per cent month-on-month in net flows. Two other ETFs that saw a boost were in our fixed income range: our subordinated debt ETF and our floating rate investment-grade bonds ETF.
“We are seeing greater interest in smart beta as investors increasingly seek broader investment opportunities that can offer diversification, selectivity, as well as targeted outcomes. The macroeconomic and geopolitical landscape has seen considerable change this year, and smart beta ETFs provide investors with a convenient and cost-effective pathway to sophisticated investment strategies designed to perform through the cycle.”
As for how advisers can use these products in their portfolios, Betashares investment strategist, Tom Wickenden, said they could act as a complement or a substitute to broad market ETFs and offer a range of asset classes and investment styles such as factor or momentum.
“Investors have far greater options to seek outperformance in their portfolio as a result of the growth of smart beta investment solutions. A smart beta ETF can be a very valuable addition to an investment portfolio and can outperform by capturing systematic sources of market returns, which have traditionally been attributed to active performance, while also adding in the benefits of lower costs associated with index investing.
“Smart beta ETFs can also be used as solutions to market risks. For example, our Equal Weight S&P 500 ETF is being used by investors to address their questions about concentration risks in the benchmark S&P 500 index.
“Even within fixed income, smart beta ETFs have helped investors address the inefficiencies within traditional bond market indices – given there is now a plethora of smart beta options to benefit from well defined risk factors like liquidity, duration, and credit.”
Speculating on where these ETFs could go in the future, Global X said: “Looking ahead, the shift from high-cost active management to low-cost, rules-based investing is likely to keep driving demand for smart beta ETFs. As investors seek targeted strategies without paying active fees, smart beta’s growth in Australia shows no signs of slowing.”
