Smart beta has crossed the Rubicon

By Rolf Agather, managing director of research, North America, FTSE Russell

The findings of our latest annual global survey of smart beta usage by asset owners (with a collective AUM of over $5 trillion), suggests that smart beta is now a standard tool in investors’ armories.

For the first time, we found that the majority of asset owners—government organizations, corporations, unions, insurance companies, sovereign wealth funds and family offices from North America, Europe, Asia Pacific and elsewhere—now allocate to smart beta.

Here are five key findings from the report. (Download the report here)

1. Asset owners in the survey not deploying smart beta are now in the minority

Global adoption of smart beta has doubled in four years. Fifty-eight percent of asset owners now have an allocation to a smart beta strategy, compared to 26 percent in 2015, when a downturn in adoption compared with our first survey a year earlier appeared to suggest that the strategy might fail to take off.

Since then, adoption of smart beta has risen consistently. Geographically, nearly two-thirds (65 percent) of European asset owners now have a smart beta exposure, versus 60 percent in North America. In our first survey back in 2014, only 42 percent of European respondents had adopted smart beta, and less than one third (32 percent) of North American respondents had adopted it.

An attitudinal watershed also appears to have been reached: only six percent of asset owners had recently evaluated and then rejected smart beta strategies, compared with nearly one quarter (23 percent) in 2015.

2. Investors are combining ESG and smart beta, but growth is not uniform

Three years ago, we started asking questions about applying ESG considerations to smart beta strategies. Interest is rising among those respondents who are using or evaluating smart beta, and 44 percent said they anticipate applying ESG considerations to their smart beta strategy.

We’ve again seen a growth in appetite for Smart Sustainability—combining sustainability parameters and risk premia, for example, via factor exposure, within a single index solution. This reflects the growing demand for the incorporation of both factors and Environmental, Social, and Governance (ESG) data into investment tools, including indexes.

But there are pronounced regional differences in the responses, most notably between respondents based in Europe and North America. For European survey respondents who either had an existing or anticipated smart beta allocation, 77% said they might incorporate ESG considerations into that allocation. However, only 17 percent of North American survey respondents with an existing or anticipated future smart beta allocation gave the same response.

3. The appetite for multi-factor strategies is rising  

In our first survey of 2014, multi-factor strategies were so new, they didn’t even feature. Now they account for the highest number of new smart beta adoptions. There has been an adoption surge in the last year: less than half (49 percent) of respondents were using multi-factor strategies in 2018, compared to 71 percent this time round.

For the first time new smart beta users were more likely to choose a multi-factor approach than any other. This adoption rate is even more apparent when we look at the North American asset owners’ experience. Our data shows that usage there now stands at 80 percent.

4. Size is no longer a deterrent

Smaller asset owners are also embracing smart beta. In our inaugural survey six years ago, the largest asset owners were five times more likely to have adopted smart beta strategies than those with AUM less than $1B.

In that year, fewer than one in 10 small asset owners were users of smart beta strategies: now 46 percent are users. But the adoption gap has narrowed in the years since, and the greatest change in adoption rates has taken place in the under $1B tier.

5. Fixed income: mind the gap

The pattern of adoption of smart beta strategies might replicate the path of passive investment adoption, where fixed income passive fund growth only followed in the wake of the rise of passive equity AUM. But that is by no means a given, and the important questions investors raised in the survey would need to be addressed first.

Overall, fixed income smart beta adoption rates have risen but are still minimal by comparison, and we found that there is no one single barrier to entry. This suggests a general unfamiliarity with the strategy, rather than a specific hurdle.

Lack of resources, enduring faith in active, lack of product, and the absence of consultant support were all cited as reasons for having not yet adopted fixed income smart beta strategies.


Overall, it now seems unequivocal that investors have truly embraced smart beta, and skepticism that it would remain niche have faded. But investors are still asking detailed questions about its use beyond equities, and in particular, in conjunction with ESG strategies.


*For the purposes of the survey we defined “smart beta” as an investment strategy that applied an index-based approach that is not traditionally market cap-weighted.

Photo Credit: 401(K) 2012 via Flickr Creative Commons

This article first appeared on the FTSE Russell blog on June 13.

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