Capital Markets Desk: Two Birds with One Stone: A Smart Beta Update

Checking on ETF industry predictions.

    David Mann

    David Mann Head of Global ETF Capital Markets,Franklin Templeton Investments

    At the beginning of the year, David Mann, Franklin Templeton’s Head of Global ETF Capital Markets, talked about the growing adoption of smart beta ETFs and the increased amount of large trades in newer ETFs. A recent large trade in a smart beta fund is a great opportunity to discuss both trends simultaneously.

    Now that we are nearing the end of the three-month mark on the year, I wanted to have a quick check in on the three predictions I made back in January. As a quick refresher:

    1. Lots of smart beta inflows
    2. Lots of large trades in newer funds
    3. Some negative market structure event

    I am going to put number three to the side for now, although at some point I might dive into a flash-crash that happened in Singapore back in January, which relates to this issue.

    Instead, I want to focus on the first two items on the prediction list, starting with number two. On Friday, March 8, an investor bought almost $450 million of Franklin LibertyQ US Equity ETF (FLQL) in one trade. The bid/ask spread at the time of the trade was three cents, and the trade occurred within the spread at one penny over the bid.

    We see trade examples like this all the time, but usually at a much smaller scale. For example, a fund trades 10,000 shares per day and an investor wants to buy 100,000 shares. It was great to see such a trade occur on a much, much, much larger scale. We hope the trend continues. In this case, the fund trades average 64,000 shares per day (YTD) and the investor purchased more than 14 million shares.

    Finishing with my first prediction, I have been pleasantly surprised with the percentage of flows going into smart beta funds in 2019. Now, back to my first prediction. I predicted $100 billion of inflows into smart beta globally, and in hindsight, I probably should have predicted an increased percentage as compared to a specific number.

    Through the end of the first quarter, flows into smart beta ETFs have been a little over $13 billion, which represents 26% of all ETF inflows thus far in 2019.1 This is slightly lagging the pace of 2018, which had $86 billion of smart beta inflows representing 27% of all ETF inflows.

    However, we wanted to highlight that if we only look at equity flows in the first quarter, smart beta accounted for 79%, making up the vast majority.2 In 2018, the $86 billion of smart beta inflows represented only 27% of all ETF inflows.3

    So even though smart beta flows are not on pace to get to the $100 billion I had predicted, the thesis of more investors looking to smart beta funds given market uncertainty does seem to hold true for now.


    1. Source: Bloomberg.

    2. Ibid.

    3. Ibid.

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