UBS Global Asset Management expects the popularity of 'smart beta' exchange traded funds (ETFs) to double by the end of the year.
According to UBS, SMSF trustees' and financial advisers' rising acceptance of these types of products is fuelling rapid growth in the sector.
Where traditional ETFs give investors instant exposure to a given index, such as the ASX, by holding the appropriate size weighting of each of the constituent stocks, smart beta products weight their portfolios according to other factors such as dividend yield or buy broker recommendations. This approach gives investors index exposure but with a bias towards an attractive characteristic.
Currently smart beta ETFs make up around 10% of the Australian ETF market but UBS ETF capability manager Stephen Small expects this proportion to double by the end of the year.
His prediction is based on the rapid take-up of smart beta ETF products in other sophisticated markets in Europe and the US.
"Minimum volatility funds alone pulled in around $5.5 billion in 2012 globally," said Small.
"Smart beta is the natural evolution of ETFs and we believe that Australia, being likened to the Canadian market, which now sits at over $50 billion in total ETF FUM, can expect similar traction."
Small adds that smart beta products combine the benefits of active management-type approaches with the ease of access and low-cost nature of ETFs.
"They are not a replacement for managed funds but a complementary product that through a rules-based approach gives assurance of portfolio construction and helps investors lower their cost base," he continued.
Aside from the rapidly growing SMSF sector, Small says there is room for plenty of take-up from the institutional market as well.
"Institutions hold around 70% of the ETF market globally but in Australia that proportion is more like 20%. Superannuation funds can't ignore them forever."
UBS launched its own smart beta ETF in Australia, the UBS IQ Research Preferred Australian Share Fund in October 2012.
Mark Oliver, managing director of iShares, says that the most popular smart beta products in the Australian market have been in equity income products, which now represent about 20% of the entire smart beta ETF market in Australia.
The iShares S&P/ASX High Dividend ETF has captured around half of that amount.
Oliver adds that its important for investors to do their research thoroughly before buying these products because even very similar sounding products can have quite different characteristics.
"The key is to look under the hood and see how the indices are built. Ours has an income bias but with a 20% cap on any industrial sector," he said.
"Others, without that cap can have as much as 60% invested in financials. Understanding that make-up is the key to understanding how smart beta income products will perform."