So-called
smart-beta exchange-traded funds were at the head of the class in 2018.
The
funds—those that track alternative, rule-based indexes instead of the traditional
market-capitalization-based ones—pulled in a net $75 billion in assets in 2018.
They accounted for half of the inflows into U.S. equity ETFs, according to Deutsche Bank ’s annual review, released last week.
Although
the absolute net flow of money to smart-beta ETFs was a little lower than in
2017—likely because markets were so volatile in 2018—their share of total flows
reached a three-year high. That indicates investors still have a strong appetite
for alternatives to cap-weighted funds such as the SPDR S&P
500 ETF (ticker: SPY).
The
majority of the money pouring into smart-beta ETFs went to the more established
factor funds: those that select stocks based on certain favorable
characteristics. Within the factor group, value funds were the most popular, accumulating $23 billion in
total assets last year. Growth and dividend funds followed, with $14 billion
and $13 billion, respectively.
Those
three types alone made up two thirds of all flows into smart-beta funds.
Preferences shifted over the course of the year. “Investors
began 2018 with high growth expectations as evidenced by $2 billion inflow to
Growth funds and a proportional amount out of Value funds,” wrote Deutsche Bank
analyst Ari Rajendra. “As the year progressed, Value funds regained investor
interest amid slowing economic indicators, sector idiosyncratic risks and
rising volatility.”
Rajendra
noted that in the fourth quarter, when the stock market plunged, investors
allocated a net $14 billion to value funds, much higher than the net $3 billion
they put into growth funds.
As
uncertainty increased, people were also increasingly looking for defensive investments and assets producing lots of income as
protection. Demand for dividend-oriented funds was high, according to the
report. “This suggests to us the search for income persists amid a regime
change in both U.S. rates and market volatility,” wrote Rajendra.
Competition
among smart-beta funds is getting tougher as more such ETFs become available,
making it harder for companies that put the funds together to find shelf space.
The number of new funds peaked in 2015, at 194; only 119 were launched last
year.
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