Little surprise—ETFs are playing a large role in the growth of strategic beta. What is a surprise is how far 401(k)s lag in adopting the investing technique.
The blanket term for index investments based on something other than market-cap weighs, strategic beta has grown in popularity since 2008. Yet because plan providers still struggle with ETF inclusion, the resulting uptick in the investing technique is slow, according to global analytics firm Cerulli Associates
“Defined contribution plans and defined benefit plans have been slower adopters of strategic beta,” Jennifer Muzerall, senior analyst at Cerulli, said in a statement. “ETFs do not fit with their investment framework and the tax efficiencies do not create the same allure for retirement plans.”
Since the financial crisis in 2008, managers have been seeking alternative approaches for better risk-adjusted returns, all while feeling pressured to reduce their fees. In an effort to free up budgets and continue achieving strong returns, investors have begun embracing concepts such as strategic beta.
“Different institutional managers are optimistic about the growth of strategic beta ETFs,” Muzerall added. “A number of institutional players are incorporating strategic beta ETFs because they allow investors to enhance returns beyond plain passive exposure, but in a lower-cost, more transparent, and liquid framework compared with active mutual fund management.”
However, she notes that smaller endowments and foundations have been large adopters of strategic beta ETFs.
“Many firms that have not been able to qualify for separate account pricing due to asset size have turned to the ETF vehicle to obtain strategic beta exposure.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of 401(k) Specialist and Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots. Experienced financial services content executive specializing in creative new media delivery. He joined the American Retirement Association in 2023 as Chief Content Officer, overseeing communications for the organization, as well as its sister organizations.
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