Smart Beta Trends

It took the industry more than 200 years to transition from a 100% discretionary selection systems to rule based portfolios. The first mutual fund was founded in 1775. The popular benchmarks were established by Charles Dow and Henry Varnum Poor in 1880’s. This was when benchmarking performance to an Index started. After the Great Depression in 1929, a portfolio of stocks assumed some importance over stock selection as many Indexing companies and rule-based funds set up shop. It was only in 1984 when Index Future started trading and the first Exchange Traded Fund (ETF) started in 1989. It was in 2002 when Smart Beta trend started. The last decade has seen smart beta contesting the incumbents and growing in size.

Estimates suggest that by 2020, the discretionary active management will reduce considerably to about 65% of the total USD 100 trillion investment management business. Smart Beta will become a dominant player in the industry along with Beta, the conventional Index investing. ETF’s have been the fastest growing financial instrument in the history of markets and have been the reason for the slowing down Mutual Fund market. ETF’s are poised to overtake traditional Mutual Funds in less than a decade. Smart Beta will continue to drive the ETF market, while Active investing is expected to grow but at a slower rate compared to the overall market growth at 6% annually.