- Three years ago, we introduced our naming convention and taxonomy for the fast-growing universe of strategic-beta exchange-traded products, or ETPs. In this year’s guide, we provide an update on the state of the global strategic-beta ETP landscape.
- In recent years, the space has grown more rapidly than the broader ETP market as well as the asset-management industry as a whole. That said, the pace of these products’ market-share gains has decelerated more recently as exchange-traded funds tracking more-traditional benchmarks have been garnering a greater share of net new flows.
- Strategic-beta ETPs’ growth has been driven by new cash flows, new launches, and the entrance of new players—some of which are traditional, dyed-in-the-wool active managers.
- We expect these trends will continue and may ultimately accelerate as newer ETPs tracking new and unproven benchmarks season and more new entrants make their way into the market.
- As of June 30, 2017, there were 1,320 strategic-beta ETPs, with collective assets under management of approximately US$707 billion worldwide. Assets in these products grew 28.3% relative to their June 30, 2016, level.
- Dividend-screened/weighted ETPs continue to rank at or near the top of the list of the most popular grouping of strategic-beta ETPs. This should come as little surprise when considered in the context of the prevailing interest-rate environment.
- Multifactor ETPs have surged in number and popularity. As of the end of June 2017, there were 349 such ETPs worldwide, with collective AUM of US$57 billion.
- The number of new product launches has come off a bit from the record level set last year. There were 204 new strategic-beta ETPs brought to market in the 12 months through June 2017, down slightly from 211 during the prior period. More strategic-beta ETPs were introduced in Europe than all other regions combined. As a result, the European menu is now looking every bit as saturated as that in the United States.
- A commonality among the markets we examined is the increasing complexity of the benchmarks underlying new ETPs. As more traditional, broad-based market-cap-weighted exposures and single factor ETFs have proliferated, ETP providers have launched more multifactor ETPs and factor-timing products are now in the works.
- As these strategies become increasingly nuanced, looking to infuse elements of an active manager’s thinking into an index, investors’ collective due-diligence burden will continue to increase commensurately. To assist investors in this process, Morningstar has assigned Morningstar Analyst Ratings to 119 strategic-beta ETPs worldwide since November 2016. These funds collectively held more than US$495 billion in investors’ money as of June 30, 2017—representing 70% of the total amount invested in global strategic-beta ETPs.
- An increasingly crowded and competitive landscape will inevitably put pressure on fees. We question how long providers will be able to justify premium pricing for these funds.
- We have already seen instances of aggressive fee reductions for strategic-beta ETPs. We anticipate that cost-competition in this space will become more prominent in the years to come.
Strategic Beta ETPs in Asia-Pacific
It was another strong year for strategic-beta ETPs in the Asia-Pacific region. Collective AUM swelled 57% to US$16.9 billion from US$10.8 billion during the 12-month period ended June 2017. This translates to a fivefold growth in three years since we published the first edition of this guide. Contrary to the pattern observed in the prior two years, growth during the 12-month period ended June 2017 was more broad-based from a geographic perspective. Most countries in the Asia-Pacific region experienced double- or even triple-digit growth in AUM. Strategic-beta ETPs in Singapore grew the most in percentage terms (180%), albeit off a tiny base and owing to the addition of a locally domiciled strategic-beta ETP. Japan-domiciled strategic-beta ETPs once again grew the most in absolute terms, adding US$4.9 billion to their aggregate AUM.
The driving force behind the strong growth in strategic-beta ETPs in Japan was the Bank of Japan’s announcement in July 2016 that it would double its rate of ETF purchases to an annual pace of JPY 6 trillion (US$53 billion) as part of its ongoing monetary stimulus program. Exchange-traded funds tracking the JPX-Nikkei Index 400, a strategic-beta benchmark that homes in on quality stocks, were eligible under the ETF purchase program. Furthermore, the program also included an annual amount of JPY 300 billion to purchase ETFs which own shares of firms that are proactively making investments in physical and human capital.
In light of the Bank of Japan’s ETF purchase program, Japan easily secured its top position in the Asia-Pacific league tables in terms of AUM. Australia remained in second position within the region. Australian strategic-beta ETPs saw AUM grow 60% in the 12 months through June 2017, driven by inflows into new and existing products. South Korea remained in third place, experiencing 10% growth in total assets.
In terms of strategic-beta ETP market maturity, New Zealand’s strategic-beta ETP assets account for 12.0% of its local ETP market assets, followed by Australia at 10.0% (up from 8.4% as of June 2016). Malaysia’s 5.4% was significantly increased from 1.7% as of end-June 2016, but the country’s overall ETF market remains very small.
Inflows into strategic-beta ETPs remain strong in the Asia-Pacific region, thanks in large part to the ongoing inflows into Japan-domiciled ETFs tracking the JPX-Nikkei Index 400. In the 12 months to June 2017, US$4.0 billion of net inflows went into strategic-beta ETPs (excluding those domiciled in China), of which 75% went into quality strategies (mainly from ETFs tracking the JPX-Nikkei Index 400). The number of strategic-beta ETPs grew to 134 from 118 during the same period (again, excluding those domiciled in China, or to 147 from 131 including those domiciled in China).
The growth of strategic-beta ETPs has continued to outpace that of the overall ETP market. As a result, strategic-beta ETPs’ share of the overall ETP marketplace has further increased to 4.3% as of June 2017 from 3.5% as of June 2016.
Quality on Top
Exchange-traded products tracking quality-oriented indexes continue to hold the top position among the subcategories of strategic-beta ETPs in the Asia-Pacific region, with a market share of 62%. The 16 quality-oriented ETPs listed in the region have collective AUM of US$10.5 billion, of which 98% came from the nine ETPs domiciled in Japan. Exchange-traded products tracking the JPX-Nikkei Index 400 further dominate the list of top 10 largest ETPs by assets. In fact, the top five positions are occupied by these ETPs. Dividend-screened/weighted strategies are the second-largest sub-category of strategic-beta ETPs, followed by multifactor strategies, which account for 17% and 13%, respectively, of the region’s total strategic-beta ETP assets. As of June 30, 2017, there were 39 and 26 ETPs in these two sub-categories, respectively, making them the most popular types of strategic-beta ETPs by number.