European Smart Beta ETF Market Trends

European Smart beta ETF market flows were sustained in 2015 but were still impacted by Q2 trend inflection. NET NEW ASSETS (NNA) for the full year 2015 amounted to EUR4.1bn, close to the EUR4.4 record level of 2014 NNA. Total Assets under Management are up 49% vs. the end of 2014, reaching EUR 15.1 billion [1]. In 2015, Smart Beta ETF flows were mainly focused around Fundamental, Minimum volatility and Multifactor ETFs, with the latter two respectively benefitting from increasingly volatile markets and investors’ search for return enhancement.

Smart Beta ETFs definition: Smart beta are rules-based investment strategies that do not rely on market capitalization. To classify all the products that are included in this category we have used 3 sub segments. First, risk based strategies based on volatilities, and other quantitative methods. Secondly, fundamental strategies based on the economic footprint of a firm – through accountant ratios – or of a state – through macro-economic measures. Then factor strategies including homogeneous ranges of single factor products, and multifactor products designed purposely for factor allocation.

Q4 2015 flows were relatively limited for Smart beta ETFs at EUR737M, far from Q1 record of EUR2bn. Yet December 2015 marked a rebound vs the limited flows of November. This is still in contrast with the overall European ETF market where November flows were limited while December flows were close to January record highs. Factor allocation ETFs saw the highest growth over the year with NNA of EUR1.5bn more than twice the 2014 NNA as investors sought new ways to enhance return. Increasing volatility expectations due to the Fed interest rate increase following end of QE and uncertainties on China growth have led to sustained flows on minimum volatility ETFs gathering a quarter of European Smart beta ETF inflows over the year. Flows on fundamental ETFs driven by high income, high dividend products continued to be signficant at EUR1.6bn due to global yield scarcity and appetite to capture structural reform in Japan.