Strategic beta exchange-traded products have grown in popularity, both in terms of number of ETPs available and also in the value of assets invested in these products. These were the findings of Morningstar’s third annual Global Guide to Strategic-Beta Exchange-Traded Products report, a global landscape analysis of trends within the space.
According to Morningstar, the global strategic beta ETP landscape encompassed 1,123 ETPs with $550.5bn in assets under management, as of 30 June 2016.
Strategic beta ETPs, also commonly referred to as ‘smart beta’ or ‘alternative beta’ ETPs, are defined by Morningstar as a “diverse group of passively managed investment products that make active bets against their broad, market-capitalization-weighted predecessors”. These strategies emphasize the use of alternative index construction rules to traditional market capitalization based indices, capturing investment factors or market inefficiencies in a rules-based and transparent way.
The report notes that the number of strategic beta ETPs in Morningstar’s database rose by 23%, from 911 to 1,123 in the year ending 30 June 2016. This is the fastest recorded pace of new product launches in the strategic beta arena, driven by a combination of new issuers entering the market and a wider range of strategies being developed.
Over the same time period, assets dedicated to the global strategic beta ETP landscape rose by 6%, from $519.2bn to $550.5bn.
The US is by far the largest market for strategic beta ETPs, with $489.8bn worth of assets invested in locally listed products, accounting for just under a quarter of the value of the total US ETP market. Dividend-screened/weighted strategies were the most popular with $132.1bn spread across 144 ETPs, followed by value strategies with $108.8bn across 42 ETPs, growth strategies with $108.1bn across 32 ETPs and minimum volatility strategies with $38.6bn across 23 ETPs.
The top 10 strategic beta ETPs by assets accounted for approximately 40% of the US total strategic beta ETP market.
The largest providers were iShares, with $193.8bn across 72 ETPs, followed by Vanguard with $105.7bn across 22 ETPs, PowerShares with $40.0bn across 88 ETPs, State Street Global Advisors with $36.7bn across 53 ETPs and WisdomTree with $36.6bn across 63 ETPs.
The weighted average fees for strategic beta ETPs in the US was 0.29%, five basis points above the weighted average fees for non-strategic beta ETPs which was 0.24%.
Morningstar believes that, due to an increasingly crowded landscape, more pressure will be placed on reducing fees in the future as stronger cost-competition in the space becomes more prominent.
Turning to Europe, the growth of the European strategic beta ETP market has continued apace, with assets under management swelling by 25% to a record $40bn in the 12 months to 30 June 2016.
Over the same period, strategic beta ETPs in Europe have boosted their market share to 7.5% from 6.3%. Fifty-eight new strategic beta ETPs hit the European market in the past year, bringing the total number of ETPs with strategic beta strategies in the region to 268.
The most popular strategies in the region were dividend-screened/weighted funds with $17.6bn across 48 ETPs, minimum volatility funds with $7.7bn across 19ETPs, multifactor funds with $5.2bn across 60 ETPs and non-traditional commodity funds with $2.9bn across 61 ETPs.
The largest providers of strategic beta ETPs in the region were iShares with $18.1bn across 35 ETPs, followed by SPDR ETFs with $3.8bn across 13 ETPs, Source with $3.2bn across 13 ETPs and Lyxor with $2.4bn across 26 ETPs.
The weighted average fees for strategic beta ETPs in Europe was 0.39%, eight basis points above the weighted average fees for non-strategic beta ETPs which was 0.31%.
Strategic beta ETP assets in the Asia-Pacific region climbed 48% to $10.5bn from $7.1bn in the year ended 30 June 2016.