Technology fundamental to the rise of smart beta strategies

Exchange traded funds have been one of the great investment success stories of the last few years, attracting huge inflows despite recent economic and geopolitical uncertainties. So-called ‘smart beta’ products, which promise to exploit the inefficiencies displayed by index-based ETFs and improve returns, have been attracting considerable interest recently, with much of the growth and innovation in the ETF space being predicted to take place in this arena.

The smart beta concept is nothing new, although the term itself has only been around for a few years, but the way these strategies are being packaged up in an ETF and made widely available to all kinds of investors certainly is. But would this have been possible without recent advances?

 “The rise of technology has been a driving force behind the development of smart beta strategies,” says Manuela Sperandeo, Emea head of specialist sales at iShares, BlackRock’s ETF business. The higher quality of data, its wide availability and improved processing power have provided the means to measure and capture systematic drivers of returns that was previously only available to institutional investors, she explains.

Improved technology has certainly helped in the construction of these products, but it also has a major role to play on the distribution side. “Firstly, technology allows a wider dissemination of information on these strategies, thus accelerating the education process and increasing awareness,” says Ms Sperandeo. “Secondly, as the availability of ETFs on distribution platforms increases, these strategies will become more accessible and potentially find a place as core strategic holdings.”

Disruptive technologies will create some great opportunities in the way financial products are distributed, agrees Denis Panel, CEO of THEAM, an affiliate of BNP Paribas Investment Partners. He points to the rise of robo-advisers, which simplify investment decisions for retail clients who can implement allocation choices via cost-efficient tools based on their risk profile and often use ETFs to build their investment offerings. “More generally, the way retail clients think about investing will change as more competitive offerings come to market with greater fee transparency,” adds Mr Panel.

Robo-advisers are a unique and compelling proposition for a certain segment of investors, believes Bryon Lake, head of Invesco Powershares Emea. “For the most part, we as issuers are providing components of a portfolio. Here is your US equity exposure, here is your European equity exposure, for example. But you still need a portfolio architect, someone to bring all these pieces together. We are providing the ingredients, but you need a great chef and there a lot of those out there. Some are IFAs, some are fund managers, some of them are robos.”

Technology is making it much easier for investors to search for, analyse, compare and eventually trade ETFs, according to Christopher Mellor, equity product manager at Source, the ETF provider. “Some of the biggest attractions of ETFs generally are that they are transparent and easy to trade. Their transparency should make it easier for investors to ‘look through’ to the underlying holdings in order to analyse their exposures.”

In addition, ETFs are becoming more readily available on adviser platforms in the UK, he explains. Until recently, the lack of ETFs on many platforms had been a major impediment for some financial advisers and wealth managers, claims Mr Mellor, but this is now starting to change.