Nizam Hamid, Head of Strategy, WisdomTree
Smart beta is finding itself increasingly front and centre of the passive universe.
The sector’s annual growth rate has overtaken the wider passive market, and we expect this to be sustained for some time as the investment landscape transforms to accommodate shifts both politically, and in terms of monetary policy. Last year, in Europe, smart beta ETF assets grew by 33% while the broad ETF market grew by 14%.
If we look at the US market investors have predominantly traded the Trump election and subsequent rally to record highs via passive strategies mainly focused on pure market cap weighted indices. European listed US equity ETFs have seen inflows of $6.6bn since Trump’s election.
Now though, investors are starting to take a closer look at managing their exposure based on the policy and macro themes that are emerging. For many investors a simple broad exposure to the US equity market may not be the best solution. Many investors desire a more tailored exposure, such as a focus on income strategies, quality stocks or value-oriented small caps, and this is where smart beta providers excel by offering investors these kinds of solutions.
Alongside this, specific strategies also allow investors to diversify away from broad indices which can be dominated by one or two key sectors and driven mainly by market momentum.
Depending on the strategy chosen, smart beta can therefore provide some much-needed protection from individual stock and sector risks.
With Trump creating uncertainty in the US, and globally, via his policy decisions, diversification could be vital for investors who are eager to maintain their equity exposure whilst refining the risks that they are exposed to. Equally, they also offer investors interesting alternatives in equities, rather than accept the often very low (or negative) yields available from deposit accounts or fixed income markets.
Of course, providing insight into how smart beta operates, and enhancing investors’ knowledge of such solutions, also remains paramount to its continued expansion.
While smart beta is no longer viewed as some kind of alchemy which is too difficult to fathom, providers cannot rest on their laurels, and must ensure that educating investors remains a focal point with respect to what smart beta can deliver, and how it delivers.
Alongside initiatives seeking to do this, such as the ETF Forum, the industry must also ensure that a wide breath of solutions is available. After all in the current environment, with a potentially era-defining Presidency taking shape in the US and the return of inflation globally, there is no shortage of challenges – and opportunities – for investors.
If smart beta ETFs can capture these opportunities and help investors navigate their way through the tangle of unfolding political and socio-economic events coming to a head, then it could be a defining year for the sector as well