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A Global Guide to Strategic-Beta Exchange-Traded Products – 2017

Fourth annual global guide to strategic-beta ETPs; Another strong year for strategic-beta ETPs in the Asia-Pacific region driven by Japan.

Executive Summary

  • 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. 

 

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Morningstar ETF analysts  -

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