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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Strategic Beta ETPs in Asia-Pacific
Asia-Pacific region experienced another strong year in 2018 which has the greatest percentage of AUM growth in the world. Collective assets under management for strategic-beta ETPs in the Asia-Pacific region grew 12% in 2018 to US$23.7 billion from US$21.1 billion a year ago. The asset growth was primarily driven by inflows into the products and new product launches in the region, despite a disappointing year of market performance. While 12% growth in the region was a slower rate compared what we observed previously (94%, 48% and 57% in the 12-month periods ended June 2015, 2016, and 2017, respectively), there were specific markets where growth rates for strategic-beta products were particularly strong, namely, in Thailand, China, and Taiwan. Once again, Japan-domiciled strategic-beta ETPs grew the most in absolute terms, adding US$1.6 billion and contributing almost 70% to the region's aggregate AUM, despite the overall Japanese market falling 12.6% in U.S.-dollar terms in 2018 (as proxied by the MSCI Japan Index).
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The Asia-Pacific strategic-beta ETP league tables in terms of AUM remained fairly similar to what we observed previously. The Bank of Japan's ongoing ETF purchases, as part of the country's monetary stimulus continued to help Japan secure its top position. Japan was followed by Australia's US$3.0 billion and South Korea's US$1.8 billion in assets.
In terms of strategic-beta ETP penetration, Australia claimed the title in the Asia-Pacific region with 10.5% of local ETP market assets. Singapore was second in the region at 8.9%; two out of the three new products launched in the Singaporean market in the past 18 months were strategic-beta products with a dividend focus.
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Inflows into strategic-beta ETPs in the region remained strong, with an estimated US$6.3 billion going into these products in 2018. Japan-domiciled ETPs tracking the JPX-Nikkei Index 400 contributed a large part of these flows. Sixty-four percent of the US$6.3 billion of inflows went to "quality" strategies (mainly from ETFs tracking the JPX-Nikkei Index 400). The number of strategic-beta ETPs grew to 190 from 157 a year ago.
During 2018, the growth in assets under management of strategic-beta ETPs was largely similar to that of the overall ETP market in the region. Strategic-beta ETPs' share of the overall ETP marketplace hovered around 4.7% to 5.0% during the period and landed at 4.7% at the end of 2018. The share of the Strategic-beta ETPs of the overall ETF marketplace has remained in the range of 4% to 5% for over 3 years, from 2016 to 2018. It shows that the ETP markets in Asia-Pacific region is becoming mature.
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Quality Earns the Top Spot, Followed by Dividend
Quality-oriented strategies continued to hold the top position among strategic-beta groups in the Asia-Pacific region, with a market share of 61%. The 24 quality-oriented ETPs listed in the region had collective assets under management of US$14.4 billion, of which 95% came from the six ETPs domiciled in Japan tracking the JPX-Nikkei Index 400. These six ETPs were also the largest strategic-beta ETPs in the Asia-Pacific region, with asset sizes ranging from US$0.9 billion to US$5.8 billion, together accounting for 58% of the region's total AUM for strategic-beta ETPs. The dividend strategic-beta group was the second-largest, with a market share of 25%. The 65 dividend strategies had collective AUM of US$5.9 billion, making them the most popular strategic-beta strategies by number. In fact, Japan, Australia, and Taiwan each had a dividend strategy among the top-10 largest strategic-beta ETPs by assets.
The fragmented nature of the region’s strategic-beta ETP market remained. Beyond the 10 largest ETP providers, there were a total of 131 ETPs managed by 48 different ETP providers occupying a collective market share of only 17%.
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