“The truth is that the move towards low-cost beta products is even affecting what’s going on in smart beta,” Nadig said. “If you look at what’s happening to average fees inside smart beta products, they’re also coming down.”
Yet institutions are sophisticated investors using smart beta as long-term portfolio core products or balancing tools, also held over the long term.
Individual investors, however, struggle to use smart beta—smart beta investors’ performance tends to trail their benchmark indexes due to their behaviors. Even within smart beta, investors have a natural urge to buy products when they’re highly valued, and to sell products when they’re at a bottom.
“People are just not very good at figuring out how to use this,” Hougans said. “They’re missing because of all the stupid things they do. This means that you’re still really valuable as advisors, you keep them from making these dumb mistakes.”
Moving forward, both men predicted more active products coming to market, and more ETF launches aimed at millennial investors.
“There are already 168 active ETFs out there, and this number will double and triple in the years to come,” Hougan said. “The top-performing active funds crush the market, but the majority of them underperform.”
Similarly, environmental, social and governance-oriented ETFs are already on the market.
These initial products, for the most part, were launched in response to institutional investment mandates, said Nadig, but more will come because of the influence of millennial investors.
“It’s easy to dismiss this as the flavor of the month, but that’s not really true,” Nadig said.
Hougan said that the ETF industry will likely set another record for flows, noting that 2016 was a historic year for exchange-traded products.