This is a hidden column

getTagNameMorningstarCorporate:blog/bigpicture

Strategic-Beta Exchange-Traded Products Suggest Maturity

The latest insights from our annual report on the strategic-beta ETP landscape

Ben Johnson

 

The universe of strategic-beta exchange-traded products has evolved dramatically over the last decade. As a result of new cash flows, new launches, and the entrance of new players, the growth in this space has outpaced that of the broader exchange-traded products market. 

This year, though, we see that while these ETPs are still experiencing market share gains, the pace of their gains has decelerated. At the same time, exchange-traded funds tracking more traditional benchmarks have been garnering their fair share of net new flows. 

We conducted this year’s evaluation of the global strategic-beta ETP landscape through the lens of our updated strategic-beta and index attributes, our first change to the structure since we introduced our naming convention and taxonomy for the strategic-beta space in September 2014. These updates enable us to explore the products in further detail and reach a more comprehensive understanding of their nuances. 

Below, explore some of our latest insights into this space. 

Continued growth of the exchange-traded product markets 

Key metrics that reflect the growth of these ETPs: 

  • As of Dec. 31, 2018, there were 1,493 strategic-beta ETPs worldwide, with collective assets under management of approximately $797 billion. 
  • Assets in these products grew 0.5% from the previous year, but this top-line growth was muted by global markets’ late-2018 drawdown.  
  • Organic growth in the space measured nearly 11% in 2018, as these products amassed $87 billion in net new cash flows. 

Understanding market maturity for exchange-traded products

This year, we saw the two key signs that the space is maturing:

  1. A slowdown in the pace of new-product launches. In 2018, 132 new strategic-beta exchange-traded products were brought to market, a precipitous decline from the 257 products introduced in 2017, indicating the saturation in this area.
  2. Intensifying fee competition. An increasingly crowded and competitive landscape will inevitably continue to put pressure on fees. We question how long providers will be able to justify premium pricing for these funds, as we have already seen instances of aggressive fee reductions for strategic-beta ETPs. We anticipate that cost competition will become more prominent in the years to come.

How to begin navigating the complex landscape of ETPs 

Throughout the various markets we examined, we see increasing complexity in the benchmarks underlying new exchange-traded products. For instance: 

  • The proliferation of more traditional, broad-based market-cap-weighted exposures and single-factor ETFs has led providers to launch more multifactor ETPs and factor-timing products.  
  • A growing number of methodology changes to the indexes underpin these funds, which further blurs their status on the active-to-passive continuum.

As these strategies become increasingly nuanced, the due-diligence burden has increased commensurately.  

To assist with this process, Morningstar has assigned Morningstar Analyst Ratings to 129 strategic-beta ETPs worldwide since November 2016. These funds collectively held approximately $570 billion in investors’ money as of Dec. 31, 2018—representing 72% of the total amount invested in strategic-beta ETPs. 

For more insight into the landscape of this space, download “A Global Guide to Strategic-Beta Exchange-Traded Products.”

Get My Copy

The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. 

The Morningstar Retirement Quiz for Advisors

Test your knowledge and get ideas for helping your clients.

Trending Research

Get our latest in-depth analysis and differentiated industry coverage.

The Advisor Toolkit

Get practical behavioral finance tools to help clients avoid common pitfalls.