Smart beta takes the index stage

I found no shortage of “ah-ha” moments when I attended the Global Indexing & ETFs conference in early December. This year’s annual gathering of leaders in indexing, exchange traded funds and investment management served up its usual dose of industry insight and perspectives on index-based investing.

First, I was struck by how important smart beta indexes have become in the minds of institutional and retail investors. Those who aren’t using smart beta indexes are hungry for more information and solid definitions. Those who are using smart beta indexes are hungry for insight on how to implement them within portfolios. We get into more detail on how investors are thinking about this in our new report on smart beta implementation.

There was quite a bit of discussion at the conference about whether “smart beta” was the right terminology. And, while it generated vigorous debate, to me it felt like investors have moved past the debate on naming. They would rather we spent our time and energy on matters related to how to use the indexes, not what to call them.

On day one, an interesting panel delved into ways that investors can use non-market cap weighted indexes as a way of getting exposure to market factors such as value, momentum, quality and volatility – for use in investment portfolio construction. Our new Smart Beta Guidebook was written to help investors think about ways to implement smart beta index tools into active and passive investment portfolio to pursue certain outcome-oriented objectives.

Second, I continue to see a growing used of index-based investment tools such as ETFs by retail financial advisors and firms. I remember when the Global Indexing & ETFs Conference was primarily populated by index providers and institutional investors. And while the institutional market for indexes continues to grow, the retail market is also growing rapidly. A panel on the second day of the conference focused specifically on how financial advisors are using ETFs and ETF managers in asset allocation models and active portfolios.

Finally, it was a thrill to participate again this year in the annual roundtable on the indexing landscape with my industry peers, including Rick Ferri of Portfolio Solutions, Brett Hammond of MSCI Indexes, Sanjay Arya of Morningstar and David Blitzer of S&P Dow Jones Indices. As moderator, Rick did a great job having us panelists discuss some emerging themes in the industry, including fixed income indexes and ESG (environmental, social, governance) issues.

With the recent IPO of Alibaba, there was also some insightful conversation about the way index providers think about country classification for companies with more geographically complex corporate structures (Alibaba entered Russell Indexes recently as a Chinese company).

And finally, a question from the audience clearly showed that there is great interest in the transparency and objectivity of index providers’ methodologies. With assets in U.S. listed exchange traded products rapidly approaching $2 trillion, expected to pass this mark early next year, and with the diversity of index-based investment strategies continuing to grow, I expect this will continue to be a hot topic.

Best wishes for a happy and healthy holiday and new year.

Ed. Note: The Russell Blog will be taking a brief hiatus over the holidays and back with new content on January 7th. We wish you a very happy holiday season and new year.