Smart Beta ETFs Can Be Used to Reduce Volatility

December 11, 2013 ( – More institutional investors are using smart beta exchange-traded funds (ETFs), many in an effort to reduce portfolio volatility.

According to the preliminary results of a new study conducted by Cogent Research, more than half (53%) of institutional decisionmakers will increase their use of smart beta ETFs over the next three years. The study finds this is higher than any other ETF category, including market-cap weighted ETFs (48%).

“Non-market cap weighted ETFs have captured 25% of the equity ETF inflows year to date, despite representing only 12% of the assets,” says John Hoffman, Invesco PowerShares director of ETF institutional sales and capital markets.

Hoffman says the study shows interest in the smart beta category is being driven by a desire to improve risk-adjusted returns, reduce volatility and gain access to more sophisticated weighting methodologies.

Larger institutions—those managing in excess of $500 million in assets—are twice as likely to agree that smart beta ETFs provide better risk-adjusted returns relative to market-cap weighted ETFs. What this means, according to the study’s authors, is institutions are focusing on managing risk in today’s market.

The study was carried out with 193 participants between September 5 and October 2. Cogent Research administered an online survey, on behalf of Invesco PowerShares, to institutional decisionmakers that include pensions, endowments and foundations, nonprofit institutions, mutual funds and registered investment advisers (RIAs) who manage institutional assets.

All institutions had at least $20 million in assets and allocated at least 1% of their assets to ETFs. Institutional RIAs had at least $25 million in assets under management, a portion of which was managed on behalf of institutional investors.

Full research results will be released in the first quarter of 2014.

Invesco PowerShares Capital Management LLC is a provider of domestic and international exchange-traded funds.