Rising smart beta in booming ETF market

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Ben Johnson
Morningstar’s second annual study of the listed smart beta market, ‘A Global Guide to Strategic-Beta Exchange-Traded Products’, shows Australia has outpaced the global universe for these tilted or engineered ETFs, with an increase of 30 per cent against the global 25.5 per cent rise over the past year.
Morningstar defines strategic beta – more commonly known as smart beta – as a class of investment products that track indices which seek to either improve performance or alter the level of risk relative to a standard benchmark, representing a fast-growing middle ground on the active-to-passive investment spectrum.
Ben Johnson, Morningstar director of global ETFs research, said: “The strategic-beta landscape is growing faster than both the broader ETP market as well as the global asset management industry, driven by new inflows, new product launches, and the entrance of new providers during the past year. Benchmarks underlying new products are more complex as well.
“As strategic-beta strategies continue to proliferate and become increasingly nuanced, investors’ due-diligence burden is growing commensurately.”
The report provides an update on the state of the strategic-beta ETP landscape, examining trends in growth, asset flows, product development, and fees. For Australia, the report notes:

> Australia’s strategic beta ETP market has continued to grow both in number of products and amount of assets. Seven strategic beta ETPs launched over the 12 months to June 2015. There are now 124 ETPs in Australia, 16 classified as strategic beta. These 16 account for $1.2 billion or 8.2 per cent of Australia’s $14.1 billion ETP market as at June 30, 2015.

> Because numbers in the report are shown in US dollars, growth appears to have decelerated from its previously rapid rate. However, this is due to substantial Australian dollar weakness. Australian strategic beta ETP assets grew by a modest 6.1 per cent in US dollar terms over the 12 months to June 30, 2015 (from $1.1 billion to $1.2 billion). But measured in local currency, growth remained rapid at 30.2 per cent.

> The broader ETP industry undoubtedly remains a major factor in strategic beta’s growth. Overall Australian ETP assets grew from $11.0 billion to $14.1 billion over the year to June 2015 (28.1 per cent annual growth in USD terms, or 57.2 per cent in AUD). Over the past three years, Australian strategic beta ETP assets grew a total of 167 per cent in USD terms while the overall ETP market increased 339 per cent (or in AUD terms, the ETP market grew 485 per cent while assets in strategic beta ETPs increased 254 per cent).

> The majority of Australian strategic beta ETPs continue to be invested in domestic equities, although the number of global equities vehicles has increased from one to five over the past year.

> Strategic beta ETP product launches in Australia have so far favoured dividend strategies. Ten of the 16 Australian strategic beta ETPs use dividends as a primary screening/weighting factor, and these 10 ETPs account for $1.1 billion of the $1.2 billion in strategic beta assets (89 per cent).

> Strategic beta fees in Australia continue to generally measure up well. Most new entrants have priced themselves at the middle- to upper-end compared with existing rivals. This is not surprising given that these new products are mostly global, not domestic equity, and many use more complicated or multiple factors. However, the market has shown itself to be price-sensitive, the cheapest strategic beta ETPs typically boasting the largest asset books.

Key global highlights include:

> The number of strategic-beta ETPs in Morningstar’s database rose from 673 to 844, from June 30, 2014 to June 30, 2015. Worldwide assets rose by 25.5 per cent, from US$396 billion to US$497 billion, during the same time period.

> Strategic-beta ETPs account for 21.2 per cent of US ETP assets, which is the largest strategic beta ETP market, and 2.9 per cent of ETP assets in the Asia-Pacific region, the smallest market, compared with 19 and 1.5 per cent, respectively, a year ago

> Dividend screened/weighted ETPs are again the most popular among strategic-beta ETPs by assets in all regions examined in the report except for the Asia-Pacific region. Quality strategies are the largest subset of strategic-beta ETPs in the Asia-Pacific region, representing US$3.8 billion and 55.4 per cent of total assets in strategic-beta ETPs as of June 30, 2015.

> There is a positive relationship between the adoption of strategic-beta ETPs and the stage of development of a region’s ETP market as well as its asset management and financial services industries at large. For example, the US has the second-oldest ETP market in the world, holding 52 per cent of strategic-beta ETPs, which account for nearly 91 per cent of total assets in the global strategic-beta ETP landscape.

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