ETF Prime: Lara Crigger on 20 Years of Smart Beta

Conversation opens with a look at the misnomer that the term “smart beta” might have been for investors when the strategy was first established and what it has grown to represent.

“I think the staying power of the term smart beta lands on is that we were trying to find this term in the industry to say that there is maybe a better way to index beyond just market cap weighting — a way to capture more return… by harnessing different factors and market inefficiencies and so on,” Crigger explained.

The evolution of the term smart beta eventually meant that factors such as growth, value, and dividend ETFs could all claim to be a part of, and when “everything is a smart beta fund, then nothing is,” Crigger said. The term has grown to encompass anything that isn’t market-cap weighted, with the Invesco S&P 500 Equal Weight ETF (RSP B+) at the forefront, launched 20 years ago as of the end of April and with nearly $34 billion in AUM.

There are currently 1,225 ETFs that are categorized as smart beta, making up over $1 trillion in AUM: “roughly one out of every three U.S.-listed exchange traded products classifies as a smart beta ETF now,” explained Crigger.

These funds are ones that investors are using more like levers for portfolios now, to amplify a growth tilt while minimizing a value tilt, or any combination, and they are using it more intentionally and to a lesser degree, as flows into smart beta products have declined in the last 12-18 months, bringing in around $130 billion last year.

“It has been interesting to see the rise of active ETFs, both transparent and semi-transparent,” Crigger said. The influx of notable fund managers into the category, including Dimensional, Morgan Stanley, and Capital Group, is noteworthy Crigger believes, akin to a “Cambrian explosion.”

Geraci notes that many of the active ETFs launched by some of the big names all carry low management fees and utilize a level of discipline similar to smart beta. Avantis is a good example of this. The fund manager largely offers rules-based ETFs while still allowing space for discretionary management regarding when and what securities trade within the funds. However, active still struggles to jump over longer-term hurdles compared to passive investing.

“Time and time again, the research shows that while active strategies might be able to outperform markets in short-term, over the long-term time horizon that performance is just not sustained in the aggregate when you look at all of active managers,” Crigger cautioned.

Ben Slavin, managing director, global head of ETFs at BNY, is also bullish on smart beta as a category that will continue to see a variety of strategies rise and fall over time. This year quality factor-based ETFs are experiencing inflows while ESG-focused funds are seeing outflows.

“There’s also quite a bit of room for innovation as investors get more comfortable and the models that are being used get more sophisticated in being able to dissect each factor,” Slavin believes. “At the same time, issuers are going to use more innovative data techniques, either because of the data that is available or, really, technology — specifically AI.”

BNY has handled approximately $1.8 trillion in notional order volume in the last year and two of the most common questions asset managers have asked in the last year revolved around how to enter the ETF space — whether they should build, buy, or partner to do so, and Slavin discussed the benefits and costs of each for asset managers.

Meanwhile, ETF innovation has continued with new strategies launched in the last year that included single bond ETFs, single stock ETFs, a nickel miners ETF, and a number of other strategies and ETFs, Geraci said.

“This is why I love ETFs — we are where the action’s at, Nate,” Slavin responded. “Every time I think we’ve seen it all, here we go with something else and the industry seems to be remarkably resilient in staying innovative.”

Last on was Phil McInnis, chief investment strategist of Avantis, to discuss the firm’s rapid rise from less than $1 billion in AUM three years ago to $21 billion currently across their ETF lineup.

“We’ve got six ETFs that are over a billion (dollars in AUM) so it’s not just a single strategy that people are finding success with or enjoying — it’s really the suite of strategies,” McInnis explained.

Avantis are firm believers in level-setting expectations of strategy performance in a variety of conditions as well as their portfolio’s asset allocations. Low fees are one of the reasons that active, transparent strategies have really taken off in recent years, according to McInnis, as well as innovation that has allowed ETFs to evolve from only passive-based to an increasingly wider range of strategies beyond passive.

Though several funds were discussed, focus fell largely on the Avantis U.S. Small Cap Value ETF (AVUV ), one of the most popular ETFs in the lineup that measures value across a variety of metrics as opposed to a singular metric like many other value funds on the market. The screen that Avantis uses ensures that companies meet certain requirements of quality as well as profitability, and that there is diversification across the constituents.

“If you take the entirety of the small-cap universe, what we’re going to be focusing in on is that most attractive quartile when you look at low price relative to equity, we call that high adjusted book to market… and then high cash-based operating profitability,” said McInnis.

For more ETF Prime podcast episodes, visit our ETF Prime channel.