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Advisors see bright future for smart beta

By: Rolf Agather, managing director of North America research

While smart beta’s popularity with asset owners has been well documented in recent years, there has been less research on financial advisors’ views of smart beta... until now.

As part of our continued commitment to educate and inform investors, FTSE Russell recently introduced findings from a new survey highlighting financial advisors’ interest and usage of smart beta index-based investment strategies. Expanding on the original US advisor survey we conducted in 2015, and as we now look to better understand broader regions’ smart beta perceptions, we queried 256 advisors spread almost evenly across the US (92 respondents), Canada (81) and the UK (83). We found the similarities as well as differences across countries to be quite telling.

Advisors in all three regions reported awareness of smart beta and are implementing smart beta strategies in their advisory practice. In each country, over half of our respondents have used a smart beta index-based strategy; most prefer strategic over tactical applications, and most see smart beta as fitting best as a complement to active management within their overall investment plan.

Regional differences reflect specific client concerns, which came to light when we asked advisors about their reasons for using smart beta. Diversification and lower cost are common goals across the board. Alpha generation and downside protection, however, are more important to US advisors than UK and Canadian advisors. Income generation and transparency are more important to UK and Canadian advisors than those in the US.

When selecting vehicles, the majority of US advisors prefer ETFs for smart beta exposure, while mutual funds and separately managed accounts are favored in the UK and Canada. However, this may simply be a reflection of the fact that there is a broader array of smart beta ETFs available in the US market.

Survey findings reveal a bright future for smart beta among financial advisors across all three regions as more than half of respondents in the UK and Canada and 40% of those surveyed in the US expect to increase usage in the next year or two. Yet a lack of information and knowledge about smart beta is still cited as a major reason for not using these strategies. Financial advisors in the US and Canada are looking for more information before increasing their usage, while UK advisors are skeptical as to the benefit, expressing concerns over predictability of performance (35% of non-users) and insufficient track records (32% of non-users).

These findings from our second advisor survey help underscore the continuing need from global index providers like FTSE Russell to educate market participants about the wide array of smart beta products available to investors.

Other key survey findings:  

  • Diversify, diversify, diversify
    Financial advisors in all three countries cited “improve diversification” as their first or second reason for implementing smart beta. Yield and income were among the top reasons cited in the UK and Canada, but not in the US. Inflation protection ranked third in Canada but was 14th and 15th in the US and UK respectively. 

  • Choice is valued
    Advisors report choosing a wide variety of factor-based and alternatively-weighted smart beta investment strategies. Yield and multi-factor rank the highest amongst Canadian advisors, while US advisors tend to prefer single factor strategies such as value, quality, volatility and (small) size, and alternatively-weighted such as equal weight and dividend yield. The UK advisors’ choices are the most equally spread across the entire array of smart beta strategies with no dominant strategy emerging.

  • Strategy over tactics
    Only 30% of US, 21% of Canadian, and 27% of UK advisors are using smart beta purely as a tactical tool. Most are using smart beta either purely strategically or as a combination of strategy and tactic.

Learn more about the background and methodology or request a full copy of the 2018 FTSE Russell Advisor Smart Beta Survey.



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