By Hamlin Lovell, NordicInvestor
“Smart beta” assets have reached $658.4 billion at the end of 2017, up 32.3% year on year, per Morningstar. Much of this resides in products that are based on only one factor concept. The simplest definition of smart beta is any index not based on market capitalisation, which means that indices such as the Russell 1000 growth and value indices can be classified as “smart beta”.
Growth and value
The largest “smart beta” ETFs are the iShares Russell 1000 Growth and Value ETFs (tickers IWF and IWD), worth $41 billion and $36 billion respectively, while the Vanguard Value and Growth ETFs (tickers VTV and VUG) contain assets of $37 billion and $35 billion in turn. Not far behind are the iShares S&P 500 Growth and value ETFs (tickers: IVM and IVE) together worth over $36 billion. Small cap, mid cap, large cap and mega cap value and growth ETFs are also available. Overall, growth and value ETFs have assets above $200 billion.
The second largest category of “smart beta” ETFs are those based on dividend yields, where Vanguard has two products (VIG and VYM) with over $57 billion of assets, iShares has one (DVY) worth $16 billion., and SPDR has SDY worth $15 billion.
Dividend growth is a variation on the themes, seen in WisdomTree US Dividend Growth Fund (DGRW), but this contains much lower levels of assets – only $2 billion.
Low volatility ETFs are the third biggest category, with the iShares Edge MSCI Min Vol US and EAFE ETFs at $14 billion and $9 billion respectively, while the PowerShares S&P 500 Low Volatility Portfolio has assets of $8 billion.
Currency hedged overseas equities
The fourth most sizeable category includes ETFs offering exposure to non-US equities, but without the currency risk. Wisdom Tree Japan and Europe Hedged Equity Funds (DXJ and (HEDJ) taken together have assets over $13 billion.
A fifth category focuses on industrial sectors, such as MLPs – Alerian MLP ETF (AMLP); natural resources – FlexShares Morningstar Global Upstream Natural Resources Index Fund – (GUNR); biotech SPDR S&P Biotech ETF (XBI) or real estate – iShares Cohen and Steers REIT ETF.
ETFs based on the momentum (or trend-following) factor include the iShares Edge MSCI USA Momentum ETF, with nearly $9 billion of assets, and the PowerShares DWA Momentum Portfolio.
The iShares Edge MSCI USA Quality Factor ETF (QUAL) is based on the earnings quality factor, and contains over $5 billion of assets.
The small cap or mid cap value and growth ETFs are combining two factors: the size factor and the value or growth factor. The PowerShares S&P 500 High Dividend Low Volatility Portfolio blends the two factors in its name: high dividends and low volatility.