ETF industry evolving to smart beta structure


By Krystine Lumanta

Email Article Print Article

Related Articles: | |

The Australian exchange-traded fund (ETF) market is set to evolve further, following the addition of semi-active or ‘smart beta’ structures whereby portfolios avoid the limitations of traditional market cap index funds that have concentrated exposures.

“Smart beta is the natural evolution of ETFs – we first went from domestic equities and now we’ve developed across the asset classes; we’re reaching a stage where we’re diversifying across the structure of the ETF with the introduction of smart beta, which is also referred to as semi-active,” UBS ETF capability manager Stephen Small told financialobserver.

“Instead of using the traditional market capitalised ETFs, people have started to respond to the limitations of these indices, recognising that they often have single stock concentration risk and sector concentration risk and if you have a self-managed super fund, you may already hold BHP and the banks so there could be some double-up.”

The original smart beta ETF structures were the high-dividend ETFs, but this has progressed with the introduction of the UBS IQ Research Preferred series.

While smart beta ETFs currently made up 10 per cent of the local market, that share could potentially double by the end of the year, Small said.

“Our market has developed strongly over the last two, three years; not only have we had phenomenal growth in terms of funds under management, going from $1 billion to close to $7 billion in about five years, the real progress has also come in the number and diversity of products,” he said.

“We’ve gone from three ETFs to over 90 and they now cover essentially every major asset class. That diversity across all the major asset classes has seen the commencement of asset allocation strategies using ETF-only solutions.”

An important component of smart beta ETFs was that they were not active ETFs and were instead completely rules based, he said.

“Once you set those rules, they are not designed to change over time,” he said, adding that they were mandated in the company’s product disclosure statement to ensure investor awareness of the fund’s investment objective.

Smart beta ETFs should be considered as a complementary investment to managed or active funds rather than a replacement, he said.

UBS said it intended to launch a second smart beta ETF focused on dividends.

« Back to Articles