Advisers requesting smarter beta ETFs


By Krystine Lumanta

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Financial advisers embracing smart beta exchange-traded fund (ETF) structures are now asking about specific exposures for future products.

“We think that smart beta will be one of the largest beneficiaries of the ETF growth this year and that has certainly started to eventuate,” UBS ETF capability manager Stephen Small told financialadviser.

“One of the reasons we are confident that it will grow as strongly as it has overseas is that when we speak to advisers and also our clients, in addition to interest in our current smart beta offering, the UBS IQ Research Preferred ETF, they’re also asking what other smart beta ideas we can create under the structure of an ETF.

“Smart beta ETFs are very flexible and can be structured to track many underlying factors such as value, quality or low-volatility portfolios.

“Some of the adviser discussions have been very promising, as the market starts developing a greater level of understanding, we’re being asked, ‘can you create this style of product for me?’”

In terms of the type of advisers requesting other types of smart beta ETFs, Small said the demand was coming from those with clients who wanted a more sophisticated portfolio with specific exposures, compared to those that preferred a generic Australian equity exposure through a low-cost, passive index product, for example.

Advisers in the market were taking an increased interest in smart beta because it allowed them to implement their clients’ investment strategies in an efficient, cost-effective and transparent way, which is where they were moving to with the Future of Financial Advice reforms (FOFA), Small said.

“A smart beta strategy adds value over and above the traditional passive straight indexes,” he said.

“Smart beta also specialises value such as the popular high-yield ETFs in the smart beta category, which have been successful over the last 12 to 18 months.”

In addition, he said significant demand for smart beta products from the institutional market was also encouraging.

“Our view is that institutional money will continue to flow into smart beta ETFs as we’re seeing now,” he said, adding that the retail segment had been the biggest user of ETFs in Australia with institutions now starting to take notice.

“In our product though, the largest portion of our first fund is held by institutions, but we continue to see increased inflows from our retail clients. But I think that both segments will grow steadily.”

Furthermore, adviser debate over active versus passive management was shifting to an outcomes-based approach, he said.

“Particularly with FOFA, it’s important to look at what exposure the client is after,” he said.

“There is no doubt there is a place in different client portfolios for active management and there will always be demand for that.

“Complementing that is pure passive [investment] and then there’s this emerging client base that are after a combination of the two. Smart beta ETFs blend the benefits of both approaches while placing a more rules-based approach around it.”

UBS will continue to add to its suite of smart beta ETFs over the next few years.

“We’re considering funds in other categories, including high yield, global equities and fixed income, all in that smart beta category because that’s the demand we’re getting from our clients,” Small said.

Russell Investments ETF product specialist Paula Boon said the discussions on smart beta ETFs with advisers had been around how to incorporate them within existing client portfolios.

“For some advisers, such as those that tilt or already allocate a portion of their portfolio to active value managers, it is more straightforward,” Boon said.

“Due to the cost constraints advisers are currently experiencing, it makes sense for these advisers to use the Russell Australian Value ETF (RVL) as a complement to their existing exposures to value managers, at a lower cost.

“On the other hand, we’ve also seen other advisers to be more cautious whereby they generally prefer to see a particular outcome-oriented ETF strategy, such as RVL, have some track-record over multiple cycles in order to ensure the underlying index construction rules are sound.”

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