WisdomTree Investments had the largest net inflows into smart beta exchange-traded funds and products this year, a fast-growing segment of the ETF market.
Smart beta equity ETFs/ETPs gathered a total of $53.7bn in the first 10 months of this year according to the Global Smart Beta ETF and ETP Insights report from consultancy ETFGI
Smart beta and factor ETFs do not track standard market-weighted indexes but follow bespoke indexes which offer outcomes such as low volatility. They are more complex than standard ETFs and their risks need to be clearly explained to investors.
Deborah Fuhr, managing partner of ETFGI, said in a statement: “Our findings show that market cap equity ETFs/ETPs are still the most popular based on assets under management where they account for$1.79 trillion, compared to $399.3bn invested in smart beta equity ETFs/ETPs. But when compared on their five-year compound annual growth rates, smart beta equity products are growing significantly faster at 39.3% while market cap has been growing at 18.6%.”
Year-to-date WisdomTree Investments has the largest net inflows into smart beta ETF of $20bn, followed by BlackRock’s iShares with $13.4bn. Vanguard is third with $6.4bn of net inflows into smart beta ETFs.
WisdomTree launched its first ETFs in the US in June 2006 and in Europe in October 2014 after acquiring UK-based issuer Boost ETP to launch a European platform. In Europe WisdomTree had assets of approximately $175m at the end of 2014, which has grown to between $750m and $800m so far this year.
Hector McNeil, co-chief executive of WisdomTree Europe, told Markets Media: “Fundamental indexing (smart beta) for ETFs has been WisdomTree’s focus since launch as we have always believed in fundamental indexing and not traditional market-cap indices. We have successfully managed to translate that experience into what the market needs from a macro perspective.”
WisdomTree originated currency-hedged ETFs for investors who want to buy overseas equities while hedging against changes in the US dollar exchange rate.
“The WisdomTree Europe Equity Hedged Fund (HEDJ) was constructed so the equity basket was exporter-tilted and is dividend-weighted as we expect that strategy to perform as Europe to continues with quantitative easing,” added McNeil.
HEDJ launched in 2009 and has grown from assets of more than $5bn at the end of last year to more than $21bn this month. This followed the success of the WisdomTree Japan Hedged Equity ETF (DXJ) which has more than $17bn in assets after launching in 2006.
Rivals such as Deutsche Bank, UBS and iShares have launched their own currency hedged ETFs but McNeil believes WisdomTree benefits from designing its own indexes, rather than licensing them from an index provider.
He said: “We develop our own indexes in-house so we can provide the right product for the right economic environment.”
Morningstar, the fund research provider, said HEDJ is an attractive choice when the US dollar is rising against the euro but is expected to underperform when the US dollar falls against the euro. Last month in the US WisdomTree made an SEC filing for four dynamic currency-hedged ETFs that “dynamically” shift the hedge position based on market conditions.
“The majority of European issuers in the smart beta market are fairly new and have a broader footprint than just that i.e are ‘supermarket providers’. They also often offer mutual funds, structured products, hedge funds etc,” McNeil added. “WisdomTree is the only listed company that focuses purely on ETFs.”
He expects one of the next developments in European smart beta ETFs to be different share classes offering broader choices to investors. In addition products will develop across the full spectrum of complexity from single factor to multi-factor ETFs.
Last month WisdomTree launched multiple new share classes across a range of its existing currency-hedged UCITS ETFs.
McNeil said: “In Europe growth stuttered in the ETF market during the protracted debate over physical vs synthetic products, but inflows have started to rise significantly again.”
Reforms over fund distribution under MiFiD II, new regulations covering financial markets in Europe from 2017, are also expected to drive ETF use as advisors move from a commission-based to a fee-based model. In the UK the Retail Distribution Review was implemented in 2013 due to concerns that financial advisors had conflicts of interest as they received commissions for selling certain products and other European countries have followed.
“There has been good growth due to regulations like RDR and similar developments affecting financial advisors in countries such as Holland, Switzerland and Germany which will take us to the next level of growth,” McNeil added. “I personally believe that in the next five to 10 years European ETFs will make up potentially 30% to 50% of mutual fund assets.”
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