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A Global Guide to Strategic-Beta Exchange-Traded Products – 2019

Fifth annual global guide to strategic-beta ETPs; Growth of strategic-beta ETPs in the Asia-Pacific region topped the world in 2018.

Morningstar ETF Analysts 21 March, 2019 | 9:00
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Executive Summary

  • In September 2014, 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, framed using our updated strategic beta and index attributes, which we launched in Morningstar's global database in the fourth quarter of 2018.
  • Over the past decade-plus, the strategic-beta space has grown more rapidly than the broader ETP market. However, more recently, the pace of these products' market share gains has decelerated as exchange-traded funds tracking more-traditional benchmarks have been garnering their fair share of net new flows.
  • Strategic-beta ETPs' growth has been driven by new cash flows, new launches, and the entrance of new players.
  • As of 31 Dec 2018, there were 1,493 strategic-beta ETPs worldwide, with collective assets under management of approximately US$797 billion. Assets in these products grew 0.5% relative to their 31 Dec 2017, level. 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 US$87 billion in net new cash flows.
  • Dividend strategic-beta group 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.
  • Low-volatility ETPs gained market share in the United States, Europe, and Canada in 2018. Across these three geographies, funds belonging to Morningstar's risk-oriented strategic-beta group brought in nearly US$12 billion in net new cash flows as investors looked for less risky ways to maintain equity exposure.
  • In 2018, the number of new product launches declined precipitously from the record level set in 2017. There were 132 new strategic-beta ETPs brought to market in 2018, down from 257 in 2017. The decline speaks to the fact that the menu has been saturated.
  • 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.
  • 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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About Author

Morningstar ETF Analysts  research hundreds of ETFs available to European investors. The Morningstar Rating for ETFs is based on a risk-adjusted performance measure.

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