Market saturation, diminishing investor confidence drives slower pace—and lower fees.
Chief Investment Officer
December 10, 2019
wo years ago, new allocations to smart beta and factor strategies were still expanding their market share. Now, however, the flow of new allocations into this space is leveling off with varying impacts across the different strategies in this segment.
Overall, new funds are still pouring into smart beta strategies. Yet, in some segments, there are pullbacks and adjustments in allocations. Investors, as they conduct their reviews, are giving considerable weight to costs and how they compare to expected performance premiums.
The slowing pace is driven in part by a proliferation of smart beta strategies to the point of saturating the market. “You see an expansive menu of products as much of the white space that had previously been available has now been covered off,” says Ben Johnson, director of global exchange-traded fund research at Morningstar. The Chicago-based investment research firm has named this sector strategic beta, covering both smart beta and factor ETF strategies.
With so many options now available, investors also face a “paradox of choice” that slows down new allocations, says Rob Arnott, chairman and founder of Research Affiliates of Newport Beach, California. “It’s like a store with bright shiny objects on the shelf, it’s harder to make a decision, not easier,” he says. Investors have $170 billion in assets managed using RAFI indexes licensed by Research Affiliates.
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