Analysts at AB Bernstein have written a report highlighting the majority of inflows into smart-beta since 2015 have been captured by strategies with lower total expense ratios.
In the report The only way is up? Smart-beta ETF trends over the past 6 months seen by Investment Week, the analysts found smart-beta ETFs with an expense ratio below 0.30% have captured more than 80% of the flows between 1 January 2015 and 1 August 2017.
Furthermore, the analysts pointed to the significant cost advantage of smart-beta ETFs over actively managed mutual funds as a crucial "structural" driver of demand.
Alla Harmsworth, head of European quantitative strategy at Bernstein Investment Research, said: "As long as there is an enormous focus on fees, and as fees for ETFs continue to decline, we expect smart-beta to carry on gaining asset share at the expense of active managers."
AB Bernstein found fees for smart-beta products remained relatively flat over the past six months, with both dividend and momentum factors' average expense ratios increasing by 0.02%.
However, Harmsworth expects to see the same sort of pressure on fees in the area as there is in the "plain vanilla" ETF space, where she said "the price wars continue in full force".
Overall, according to the report, smart-beta ETFs continue to record strong inflows across the spectrum with total assets under management (AUM) rising 11.5% to $660bn over the past six months, which accounts for 4.2% of the total global AUM and 16% of the total ETF AUM.
When drilling down into individual factors, although only accounting for a small proportion of the market, momentum and multi-factor ETFs witnessed rapid growth rises of 59% and 44% respectively.
Harmsworth added: "The multi-factor ETF category is continuing to experience an influx of new entrants with recent launches including the Hartford Funds suite of multi-factor ETFs, UBS MSCI USA Select Factor Mix ETF, PowerShares S&P 500 QVM ETF and WisdomTree US Multifactor ETF."
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