Smart beta holds up despite popularity of thematic ETFs


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Thematic strategies have become the darlings of the ETF industry, with managers offering products that seek to combine outperforming stocks and a story that investors can easily understand.

Their buzz was once the purview of smart beta, which focuses on investment factors that have proven to outperform such as momentum, growth or value, but these products have lost their prominence among many lines. managers.

However, smart beta and thematic ETFs don’t have to be at odds to gain the attention of ETF stores and investors, the executives said. While both product categories can serve the same portfolio goal, they do so in very different ways – and stores can use both to their advantage.

“Conceptually, the themes, sectors and factors are all the same – they are building blocks,” said Denise Chisholm, director of quantitative market strategy at Fidelity.

This article was previously published by Ignites, a title belonging to the FT group.

Smart beta, sometimes referred to as strategic beta, and thematic strategies group together stocks that share similar characteristics. But the quantitative screens used to identify stocks that fit a theme often result in portfolios that have a mix of sectors or factor inclinations that can change as the theme unfolds, Chisholm noted.

This makes thematic strategies, which have a long investment horizon, a “natural pairing” with specific factor and sector strategies whose attributes tend to be more discreet and easy to analyze on their own, she said. added.

The rise of largely tech-oriented megatrend ETFs has accelerated since the start of the pandemic. Last quarter, 26 thematic ETFs were launched in the United States, bringing the total number of such strategies to 198, according to Global X. US thematic ETF assets grew 128% year-on-year to 133.7 billion dollars in late September, the New York-based ETF shop data shows.

Last week, Fidelity and Invesco added to the theme stack. Fidelity has launched four ETFs that cover topics such as clean energy, cloud computing, digital health and electric vehicles. Invesco, meanwhile, has partnered with Galaxy Digital to launch two ETFs targeting cryptocurrency and blockchain.

Both companies have also played an important role in the area of ​​smart beta. Fidelity held 13 strategic beta ETFs with combined assets of $ 4 billion as of September 30, according to Morningstar Direct, and Invesco had 119 with total assets of $ 109 billion as of the same date.

Other factor-driven ETF players, including WisdomTree, First Trust and BlackRock, have also bet big on themes in recent years. Smart-beta launches have slowed down.

Last week, 13 ETFs identified by Morningstar as strategic beta were launched in the United States this year. This compares to 21 for all of 2020 and 65 in 2017.

“People have evolved to get more granular and active exposure through thematic,” said Rolf Agather, research and product manager at Morningstar Indexes.

Themes can also be easier for advisors to understand than factors, said Marc Zeitoun, head of strategic beta at Columbia Threadneedle Investments.

But in reality, managers can use a similar approach to explain the factors. “There are two types of [investment] solutions: those that provide access and those that provide performance, ”he said.

The fate of smart beta versus thematic also has a lot to do with what actions have been in favor, said Jeremy Schwartz, global head of research at WisdomTree, noting that over the past 10 years, this competition for popularity had been dominated by the great United States. technology growth stocks such as Facebook and Netflix.

Meanwhile, smart beta strategies have been affected by the underperformance of low-volatility indices, noted Matthew Bartolini, head of SPDR Americas research at State Street. “The low volatility has failed to cope,” he noted. These products have seen 20 consecutive months of cash outflows, leading to a decline in overall smart-beta sales, he said.

But even with these woes and Smart Beta’s equally important bent on value and quality factors that haven’t excelled since before the pandemic, sales of these products are in line with the five-year average, said Bartolini. Smart-beta products have attracted around $ 44 billion in net flows in the first nine months of 2021, according to State Street.

Strategic beta has also gained quite a bit of market share over the past year. Some 18.8 percent of all U.S. ETF assets were in such products as of September 30, down from 18.5 percent a year earlier, according to Morningstar Direct.

“I don’t see the theme taking part in the smart beta,” Bartolini said.

* Ignites is a news service published by FT Specialist for professionals working in the asset management industry. It covers everything from new product launches to regulations and industry trends. Trials and subscriptions are available at

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