2. Outsmarting Smart-Beta
Of course there are some ETF investors who are looking to beat the market. But, many of them have been choosing smart-beta ETFs over actively-managed ETFs to do so.
The term 'smart-beta' describes rules-based ETFs that use something other than market cap (aka ‘beta’) to select or weight their holdings. By selecting or weighting stocks on factors such as dividends, volatility, value or momentum, smart-beta ETFs have essentially packaged the market-beating strategies of active managers into a low-cost and passively-managed vehicles for half or a third of the cost.
Smart-beta ETFs have approximately $400 billion in assets, or 20 times that of actively-managed ETFs. With 20 percent of the $2 trillion in ETF assets, smart-beta ETFs fill the giant canyon that exists between active and passive and that’s bad news for the former group because it cuts right into their target market.
3. ETF Managed Portfolios Are Another Competitor
Another new alternative to active mutual funds are ETF managed portfolios. These are all-ETF portfolios run by asset managers, sometimes called ETF strategists. These off-the-shelf solutions are being used by advisors to achieve goals that they may once have used an active mutual fund for. There are more than 600 of these managed portfolios from roughly 150 firms with assets of north of $70 billion, according to data from Morningstar Inc.
The good news for ETMFs is they should appeal as a better, cheaper deal for existing mutual fund investors and could intercept some of the money that may have been going over into ETFs. After all, there is more than $10 trillion invested in stock and bond mutual funds and some of that may follow these firms into their ETF structure and into their own brave new ETF world.