Smart beta and ETF's - picking up followers at a fast pace

A recent EDHEC survey of global investors show that smart beta ETF's is picking up investor interest at a fast pace. This is a simple direct way to get factor exposures with transparency.  The definition of smart beta at its simplest form is a catch-all for non-market cap weighted portfolio. It can be anything from an equal weighted portfolio to something like a growth or sales-weighted factor. We can say that there has been the development of different generations of smart beta with 1.0 being fixed factor weights and smart beta 2.0 being flexible factors or exploitation of allocations within a factor.

25% of survey respondents have already used smart beta products and 2/3rd are either using or considering the use of smart beta products. The ETF form has made it very easy to get in and out of the market and make asset allocation decisions. Smart beta ETF's is being used as a tool just behind the main asset class ETF's. It is going to be a harder argument to use a actively managed mutual funds when there are cheap smart beta available.

We think that the smart beta demand will lead to more interest in global macro investing or more precisely dynamic and tactical asset allocation. There will be a premium on making allocation decisions across risk premiums and asset classes as opposed to picking stock based on factors. You can buy factor betas, but now you have to determine the sizing in the portfolio and the adjustments as the factor performance change through time.