Major misalignments exist in the use of strategic, or smart, beta. Providers are positioning it as an alternative to passive strategies, while advisors are actually using it as an alternative to active management.
The messages are mixed, and confusing investors, especially when reasons are given for its inclusion in the portfolio, according to research and consulting firm Cerulli Associates.
“Advisor use of strategic beta seems to be more focused on the notion of mitigating risk versus generating alpha,” states Jennifer Muzerall, associate director at Cerulli. “Just [over] 60 percent of issuers assert they are positioning strategic beta to generate alpha, whereas the most-cited reason why advisors are using strategic beta is for downside risk protection.”
Strategic beta, which seeks to deliver better risk-adjusted returns relative to traditional market-cap-weighted allocations, include elements of both passive and active investing. They’re active in their objective of outperforming broad market indices, but also passive in their systematic and rules-based implementation.
The firm notes that 38 percent of asset managers predict that it will most likely be the primary feature of next-generation target date products.
“While strategic beta can achieve both investment objectives, issuers’ messaging may not be resonating with advisors,” explains Muzerall. “Our findings from our latest ETF report reveal a huge education gap that issuers need to address. Issuers need to continue to develop their message to help advisors understand the benefits and uses of strategic beta.”
Cerulli’s research indicates that ETF issuers, in particular, have a long way to go to increase adoption among advisors.
To encourage the adoption of strategic beta, ETF issuers need to address the mixed messages about how to position strategic beta in a portfolio, and what advisors are looking to achieve by using strategic beta.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of 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.
