Smart beta style exchange-traded products are gaining an increasing share of the global market, a new Morningstar report shows. Apparently, investors are turning away from traditional indices.
The Morningstar study says smart beta – or ‘strategic beta’ in the research house’s preferred parlance – ETPs grew at a faster pace than products linked to more straight-laced benchmarks. ‘ETPs’ is the new and over-arching term used for both passive (ETFs) and active (exchange quoted managed funds).
“Strategic-beta ETPs are making inroads against their peers that are benchmarked to more-traditional indexes,” the Morningstar report says. “While their market share has been increasing in every major region that we have examined, they have made greater inroads in large, more-mature markets than they have in smaller, less-developed ones.”
According to Morningstar, worldwide strategic-beta ETP funds under management jumped more than US$30 billion over the 12 months to June 30 this year to finish the period at about US$550 billion. During the same period strategic-beta product numbers rose a record 23 per cent, helped mostly by a rash of issuance in the US.
The US accounted for more than 60 per cent of the 212 new smart-beta ETPs launched globally over the annual period, the Morningstar data shows. As at the end of June this year Morningstar put the global strategic-beta product headcount at 1,123, of which 608 are domiciled in the US.
“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,” the study says.
“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.”
Despite the relatively slow growth of strategic beta products in the Asia-Pacific region (where they represent 3.5 per cent of the ETP market compared to almost 22 per cent in the US), the sector took off in New Zealand during the year.
New Zealand, included for the first time in the Morningstar smart-beta report (which published its inaugural report on the sector in 2014), saw a rapid uptake of smart-beta ETPs over the 12-month period growing 89 per cent “off a small base”.
The research house classified five of the 23 NZ-based ETPs – all offered by the NZX-owned Smartshares – as strategic-beta, “ranging from dividend-screened/weighted or equal-weightedNew Zealand equities to U.S. equity value and growth strategies”.
“At June 30, 2016, total assets under management in New Zealand ETPs was US$1.1 billion,” the Morningstar study says. “Meanwhile, strategic-beta ETPs amounted to US$135 million—amounting to a 12.2% market share.”
Most of the Smartshares funds feed into ETPs managed by Vanguard. According to the latest NZX data, the stock exchange’s wholly-owned funds management subsidiary, SuperLife, represents more than $1.1 billion of the $1.6 billion currently invested in the Smartshares range.
“All of New Zealand’s strategic-beta ETPs were launched between December 2014 and July 2015, so it is relatively early days for the market,” Morningstar says.
Across the Tasman, the smart-beta market was up almost 21 per cent over the 12-month period compared to 18.2 per cent for the broader Australian ETP sector, the report says, with four new releases and one product changing its benchmark “to a strategic-beta index”.
“On our count, there are now 154 ETPs in Australia, 21 of which we classify as strategic-beta,” Morningstar says.
“Those 21 ETPs account for $1.39 billion, or 8.4% of Australia’s $16.7 billion ETP market. While that is a little higher than the market share of 8.2% that we reported in June 2015, it is not as high as the peak market share for strategic beta, recorded at 10.1% in April 2014.”
The report says in all but one region dividend-focused ETPs remained the number one strategic-beta sector while low-volatility/minimum variance products “have surged in popularity”.
At the same time, Morningstar says the increased competition is putting price pressure on smart-beta ETPs, especially in the US where there have been some “aggressive fee reductions”.
However, the report says investors need to keep a close on the underlying strategic-beta indices as they move further away from the traditional market-cap weighted variety.
“A commonality among the markets we examined is the increasing complexity of the benchmarks underlying new ETPs,” Morningstar says. “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.”
- David Chaplin, Investment News NZ