Even as ETFs further their penetration into markets across the globe, many market experts say the funds will evolve and mature in the upcoming months, as advisors look to alleviate client concerns.

The popularity of smart beta ETFs is still on the rise - up nearly 44% across retail channels in the last year according to Broadridge Financial Solutions. Broadridge Senior Vice President of Access Data Frank Polefrone says he expects this trend to continue, especially in retail channels that are driven by advisors.

"I just see more and more of this product innovation and acceptance of products that marry active management with features of ETFs," Polefrone says.

"We see more and more mutual funds adding them where they think it compliments product line, but we think asset managers will likely offer both ETFs and funds together."

In a recent study from Market Strategies International, researchers found that early adopters of the smart beta ETF have roughly doubled the percentage of overall allocation from 7% to 13% between late 2013 and early this year, according to John Feyerer, vice president and director of the Invesco PowerShares equity ETF product strategy.

These figures, Feyerer says, suggest that "ETF implementation will continue to evolve and grow in the near future," adding that "the emergence of smart beta strategies with established track records will continue to broaden ETF applications for both retail and institutional investors."

Dissenting was Ethan Powell, chief product strategist and executive vice president at Highland Capital Management. He predicts investors will move away from smart beta ETFs and into solutions that address risk concerns.

He suggests that investors are now looking for ways to insulate themselves from volatile risk assets by going into non-correlated equity market exposure, much of which are hedged strategies or others that help remove some of that volatility.

"In the first five months of the year, you saw $55 billion leaving domestic equity funds, and I think what people were doing was trying to take some of their gains off the table - with the S&P up well over 200% since the (financial crisis of 2008) - and find other asset classes or other solutions as an alternative to the long," Powell says.

In the short-term, Powell adds solutions like volatility risk assets will emerge to help alleviate investor concerns, addressing the economic troubles in Greece, as well as issues relating to regulatory proposals here at home regarding liquidity concerns.


There is consensus, however, that the dominance of ETFs as an investment vehicle will not be hindered.

"We've been tracking ETFs versus mutual funds, and we've seen where retail investing is driving the growth of ETFs in a bigger way," Polefrone says. "At end of the first quarter of 2015, ETFs added more equity assets than mutual funds."

According to its latest market report, 76% of advisors say they are selling ETFs to their clients, up from 68% just two years ago.

The combined assets of U.S. ETFs continued to rise in the past month, up $16.5 billion in April to $1.27 trillion across more than 1,411 funds at the end of May 2015, according to the Investment Company Institute. In the last year, ETF assets have seen a near 20% boost, or the equivalent of a $342.13 billion increase, ICI says.

Domestic equity ETFs were up about $200 billion year-over-year, as global equity ETFs jumped $96.9 billion during the same period, according to ICI.

Bond funds slipped $1.9 billion in the May to $319.9 billion as hybrid funds maintained at around $3.6 billion in assets over the same period, ICI says.

At $13 billion, flows into the investment vehicle were slightly up in April, according to Cerulli Associates.

The U.S. currently holds the largest portion of the ETF market, with 73% of the total world's ETF assets, ICI says.


Despite the troubles emanating from Greece, Powell predicts currency-hedged ETFs will continue to thrive.

"I think you see investors trying to isolate risk and employ very specific investment thesis that isn't necessarily brought down by such things a global monetary and economic policies," he says.

Investors had over $47 billion in assets invested in the currency-hedged ETF as of March 2015, according to ProShares. Meanwhile, the asset-weighted average expense ratio for currency-hedged European equity ETFs was 0.56%, while currency-hedged Japanese ETFs was 0.47%.

Feyerer agrees, explaining that the introduction of products like the smart beta ETF, which combines a currency-hedged approach with that of smart beta strategies such as low volatility provide additional tools for investors, will help mitigate both the exchange rate risk and overall volatility within the allocation.

"While flows into currency-hedged ETFs have moderated slightly," Feyerer says, adding that "compared to the pace we saw earlier this year, we believe the backdrop of globally divergent monetary policies will continue to guide investors toward the potential benefits of hedging their currency exposure within their international equity allocation."


While there were approximately $20 billion of new net flows in actively managed mutual funds and ETFs through May 2015, there were also $182 billion in passively managed funds in the same time period, Powell says, adding that last year there were an estimated $40 billion in actively managed funds and $400 billion in passive.

"I think for this solution, what we're talking about it's really 85 basis points," Powell suggests. "That's relatively inexpensive passively managed ETF exposure to what active managers are trying to do from an alpha generation perspective, particularly on the hedge fund universe."

What's trending now, he says, are passively managed hedged funds that are designed to track management consensus. They track their active strategies to provide something differentiated from long-only beta exposure like that of the SPDR or long-only equity options, he says.

"People with beta are moving to more sophisticated passive strategies that they think will outperform the equity market as whole," Powell says. "That's where you'll see more and more evolution." 

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.