Institutional money managers are increasingly turning to ETFs, citing liquidity, transparency and ease of implementation.
In particular, institutional investors have expressed a growing interest in smart beta ETFs, finds an Invesco PowerShares survey.
Smart beta indices employ alternative security selection and weighting criteria with the goal of outperforming a market-capitalization-weighted benchmark or reducing risk.
Smart beta ETFs captured over 17% of total U.S. ETF equity inflows in 2014, despite representing only 11% of institutional ETF assets. Thirty-six percent of institutional investors used smart beta ETFs, up from 24% in 2013, while the mean allocation rose to 13% from 7%.
Performance was the primary motivator for smart beta ETF usage for 22% of the survey’s 253 respondents, followed by reducing volatility (19%) and seeking exposure to specific assets (15%).
Advisor industry contributor Mark Yamada breaks down smart beta basics:
“Fundamental indices and value based funds tend to outperform [market cap weight] at the same time, affirming a value bias. These are active tilts that can be used independently or in combination with other strategies.”
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