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Take the Mystery out of Smart Beta

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Take the Mystery out of Smart Beta

While no one dressed up like an ETF this Halloween (at least not in my neighborhood), those of us in the finance industry know that ETFs are quite the rage these days. Not only has the AUM in exchange-traded funds doubled in the past three years alone, jumping from $1 trillion in 2012 to more than $2 trillion in 2015, but according to Morningstar, more than 260 new ETFs have been introduced in just the past 12 months. And while the low costs and high tax efficiencies of ETFs have been lauded in the industry, Smart Beta ETFs seem to remain a mystery to many. In fact, when we surveyed 175 RIAs at last month’s Nasdaq Smart Beta Symposium, we discovered some facts that were even more alarming than even the scariest Halloween haunt.

Here are the facts:

The majority of investors are in the dark when it comes to Smart Beta ETFs.

Survey responses showed that less than 2% of clients are asking for Smart Beta ETFs. That means that more than 98% of clients either don’t understand the value of a Smart Beta ETF—or they simply don’t know they exist. Either way, it’s up to advisors to educate investors so they understand when, why, and how to incorporate these funds into an overall investment strategy.

Many advisors have trouble explaining Smart Beta ETFs.

The need for investor education can be a significant challenge if the advisor can’t provide clear, concise information. The challenge, of course, is that the complexity is real, and some smart beta techniques seem to require a master’s degree to understand the basic premise. That’s no doubt why 45.9% of advisors surveyed named complexity as their biggest concern when using Smart Beta ETFs. It seems that deciding which “smart” is the best choice for your portfolio can feel a lot like choosing from a too-large dinner menu; with too many choices and not enough detail, it’s nearly impossible to discern the differences.

Advisors want to expand their use of Smart Beta ETFs.

According to the survey, 67.9% of advisors plan to increase the amount of Smart Beta ETFs in the next 12 months. But how? If advisors are confused about the offering, how can they educate their clients? If they are challenged by the complexity of the offerings, how can they choose the “right” menu item and then accurately explain it to their clients?

Now for the good news. First, just over half of the advisors surveyed (54.3%) said they are receiving enough education about Smart Beta ETFs. That’s great news for advisors and their clients, since the more advisors understand about the funds, the better able they’ll be to educate their clients, and the more likely it is that investors will give the green light to leverage them in their overall strategy. Second, since 77.8% of advisors feel their clients are not receiving enough education about Smart Beta ETFs, advisors are in an ideal position to make a significant difference in this area. By clearly communicating the why, what, and how about Smart Beta ETFs, advisors have the power to potentially increase the growth of their clients’ portfolios over the long term.

If you’re an advisor struggle to understand smart beta ETFs, our team at Nasdaq Dorsey, Wright & Associates can help. With an objective online research platform designed specifically for advisors, Nasdaq Dorsey Wright empowers advisors with knowledge and insights, and provides an objective methodology for making investment decisions—all focused on Smart Beta ETFs. You can view the complete survey results from our Smart Beta Symposium here.

And when you’re ready to start sharing that knowledge with your clients? Our recent article “An Easy Way to Explain Smart Beta to Clients (with a Little Help from M&Ms)” is the perfect way to begin the education—and start the conversation. After all, M&Ms aren’t the only Halloween candy out there, but with a little guidance, they may be just what you need to take the “eek!” out of Smart Beta ETFs and deliver a treat your clients will appreciate for years to come.

To learn more the DWA Technical Research Platform, click here to take a free 21-day trial. To learn more about Relative Strength and the Dorsey Wright Relative Strength strategies, download the whitepaper Point & Figure Relative Strength Signals, or contact us here.

Dorsey, Wright & Associates, LLC, a Nasdaq Company, is a registered investment advisory firm.  Neither the information within this article, nor any opinion expressed shall constitute an offer to sell or a solicitation or an offer to buy any securities, commodities or exchange traded products. This article does not purport to be complete description of the securities or commodities, markets or developments to which reference is made.

The relative strength strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value. Relative Strength is a measure of price momentum based on historical price activity. Relative Strength is not predictive and there is no assurance that forecasts based on relative strength can be relied upon.

Past performance, hypothetical or actual, does not guarantee future results. In all securities trading there is a potential for loss as well as profit. It should not be assumed that recommendations made in the future will be profitable or will equal the performance as shown. Investors should have long-term financial objectives.  Advice from a financial professional is strongly advised.

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