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How BlackRock, Goldman Seduce Hedge Fund Clients in $2.4 Trillion Market

Computers are taking over the money-management industry.

At least, that's one conclusion to be drawn from the soaring popularity of so-called smart-beta exchange-traded funds, which employ algorithms that engineer stock portfolios based on "factors" like value, growth, low volatility, or some combination of them all. Big traditional money-managers like BlackRock (BLK) , JPMorgan Chase (JPM) and Goldman Sachs (GS) are flooding the market with new ETFs to meet investor demand.

The number of smart-beta ETFs has doubled in the past five years to 579, while their assets under management have tripled to $471.2 billion, according to Morningstar. Last week, New York-based BlackRock, the world's largest money manager, projected that smart-beta ETFs' assets will surge to $1 trillion by 2020 and $2.4 trillion by 2025.

They're known as smart-beta funds because they purportedly improve upon the low-fee, purely index-based investing that's fueled the surge in total ETFs to more than $3 trillion; such passive strategies are known as "beta" because they aim to match the performance of an entire market, such as the Standard & Poor's 500, contrasted with "alpha" strategies that aim to beat the market.

Smart-beta ETFs are shaking up money management because they offer alpha at beta-like fees -- partly by using computer programs to replace human stock-pickers. The average fee for the new funds is 0.5% of assets, compared with 1.1% for active mutual-fund managers, according to Morningstar. The ETFs are also stealing market share from hedge fund managers who typically charge 2% plus 20% of any gains.

"It's the trend in the buzz-o-sphere," said Matt Hougan, chief executive officer of, which tracks the industry. "It's all anyone wants to talk about these days."

Just last week, JPMorgan Asset Management started its eighth smart-beta ETF, the Diversified Return U.S. Mid Cap Equity ETF (JPME) . The new fund filters U.S. stocks to identify medium-size companies with cheap market valuations, trading momentum and high-quality earnings, according to a statement.

It's "built to address the flaws of traditional indexing through a risk-managed, multi-factor process," according to the New York-based firm.

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Just the fact that JPMorgan, which oversees at least $263 billion in mutual funds, would roll out a low-cost ETF shows traditional money...