So-called smart beta (also called factor or strategic beta) ETFs have recently crossed $500 billion in combined AUM, and Bloomberg wonders if the fad has become too hot. Fundsters in product development, take heed.

Michael Iachini Charles Schwab Vice President, Head of Manager Research

ETFs aren't the only big chunk of smart beta cash. Bloomberg notes that "hedge funds have as much as $300 billion in quant strategies, much of it incorporating factor logic."

The publication talks to AQR Capital Management [profile] chief (and famed smart beta guy) Cliff Asness, DePaul University finance professor David McLean, Charles Schwab Investment Advisory ETF and mutual fund research chief Michael Iachini, and Goldman Sachs Asset Management [profile] global head of ETF strategy Mike Crinieri.

With so much money pouring into smart beta strategies, Bloomberg says, the question is whether or not the effectiveness of the trade is being crowded out. McLean says that, three years after academic papers outline an investment idea, that idea is less than half as effective in terms of returns.

"I won't pretend I don't wish we were the only ones who knew about these," Asness tells Bloomberg.

"I would set my future expectations lower for smart beta factors," Iachini tells Bloomberg. "I'd expect less because there's more money there."

Yet it's worth noting that there are many different factors. So even if there's crowding in one factor, that doesn't mean that crowding is necessarily affecting another such factor. 

Edited by: Neil Anderson, Managing Editor


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