The rise of smart beta products in the exchange traded funds (ETFs) industry is explored in Moody's new report, Promising Futures: Smart Beta Product Evolution Will Benefit Certain ETF Providers.

“Smart beta or 'intelligent indexing' is an investment strategy that resides in between passive and active management,” said Stephen Tu, Moody's vice president and author of the report. “It attempts to deliver higher returns to investors by using an alternative form of indexing based on risk premia such as dividend yields.”

Compared with passive management, smart beta promises enhanced returns over cap-weighted benchmarks. Compared with active management, it offers potential returns over traditional indices at a lower cost with greater transparency.

Following a 24.6% increase in assets last year, ETFs are looking to grow further via new methods. Smart beta is currently the fastest-growing sector within the ETF space, expanding at an annual rate of 43% in terms of combined AuM of the top six players. NYSE Liffe recently launched a suite of smart beta futures based on MSCI factor indices.

Although smart beta represents only 19% of total ETF assets, the futures contract launch has strengthened the institutional credibility and acceptance of the investment strategy.

“The expansion of smart beta will benefit certain asset managers,” added Tu. “Invesco's Powershares franchise, which offers smart beta ETFs, will benefit, as will Blackrock. Guggenheim may also benefit given the majority of its ETFs are based on non-traditional indexing.”