European Smart Beta ETF Market Trends

European Smart beta ETF market flows are still positive in the second quarter of 2015, but growth has decelerated compared to Q1 2015. NET NEW ASSETS (NNA) year to date (30/06/2015) amounted to EUR 2.3 billion, i.e. 60% of the 2014 NNA within the first half of the year. Total assets under management are up 41% compared to the end of 2014, reaching EUR 10.9 billion. Year to date, ETF flows are still sustained on all three smart beta categories even though Q2 2015 have been impacted by increasing market volatility.

Definition of smart beta ETFs: smart beta denotes rules-based investment strategies that do not rely on market capitalisation. We have used 3 sub-segments to classify all the products that are included in this category. First, there are risk based strategies based on volatilities and other quantitative methods. Secondly, there are fundamental strategies based on the economic footprint of a firm or state – through accountant ratios or macro-economic measures, respectively. Lastly, there are factor strategies, which include homogeneous ranges of single-factor products and multifactor products designed purposely for factor allocation.

Q2 2015 was the smallest quarter in terms of inflows for smart beta ETFs over the span of one year, in line with the overall European ETF market flow trends in May and June, which were highly impacted by the increasing volatility on all markets.

In this context, fundamental ETFs continued to be favored with still some inflows on the fundamentally build benchmark Nikkei 400 and also significant inflows on the Quality income indices.

The latter offer attractive dividend yields and defensive profiles against a backdrop of heightened uncertainties and low interest rates. For the first time, risk-based ETFs have started to see some outflows, in particular on Min Vol/Low Vol ETFs. In the factor allocation space, investors have also been rather cautious in May and June.