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Morningstar Strategic Beta ETP study reveals pressure on fees


Morningstar has published its fifth annual Global Guide to Strategic-Beta Exchange-Traded Products, revealing that while smart beta ETP assets expanded just 0.5 per cent in 2018, organic growth in the strategy was strong.

Net new inflows into smart beta ETPs globally totalled USD87 billion, according to Morningstar, a growth rate of 11 per cent.

The firm reports that over the past decade-plus, the smart beta space has grown more rapidly than the broader ETP market, driven by new cash flows, new launches, and the entrance of new players.

Morningstar comments that more recently this fast growth has decelerated and questions whether an increasingly crowded and competitive landscape will inevitably continue to put pressure on fees, and how long providers will be able to justify premium pricing for these funds.

Globally, smart beta ETPS, as of 31 December, 2018, totalled 1,493 with collective assets under management of approximately USD797 billion worldwide. Morningstar notes that strategic-beta ETPs have made inroads against their peers that are benchmarked to more-traditional indexes.

European smart beta ETPs seem to have been the hit the worst. The report finds that the European strategic-beta ETP market shrank by 5 per cent to USD57.4 billion over the course of 2018, while Strategic-beta ETPs’ share of the total European ETP market held steady over the course of the year, finishing at 7.5 per cent.

There were some common investment themes across the world, with ETPs belonging to Morningstar’s dividend strategic-beta group continuing to be among the most popular grouping of strategic-beta ETPs in most regions.

The search for income is inevitable given the prevailing low interest rate environment. Next in the popularity stakes are low-volatility ETPs which 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 USD12 billion in net new cash flows as investors looked for less risky ways to maintain equity exposure, the firm says.

As for fees, strategic-beta ETPs tend to charge expense ratios that are more competitive than their comparable actively managed peers (though in some cases only marginally so), the report says.

However, they are more expensive than their passive plain vanilla peers and Morningstar predicts that fees charged by smart beta ETPs will come under further pressure, particularly if providers want to stand out in an increasingly crowded landscape.

The Asia-Pacific region stands out for a 12 per cent growth in the collective assets under management for strategic-beta ETPs, up to USD23.7 billion from USD21.3 billion a year ago.

This figure is dominated by Australia, which has 10.5 per cent of local ETP market assets, with Singapore second in the region at 8.9 per cent; 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, Morningstar comments.

The Asia-Pacific asset growth was primarily driven by inflows into the products and new product launches in the region, despite a disappointing year of market performance (the MSCI AC Asia Pacific Index returned negative 13.3 per cent in 2018 in US-dollar terms).

Morningstar writes that while 12 per cent growth in the region was a slower rate compared what we observed previously (94 per cent, 48 per cent and 57 per cent 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.

Japan-domiciled strategic-beta ETPs grew the most in absolute terms, adding USD1.6 billion to the region’s aggregate AUM, despite the overall Japanese market falling 12.6 per cent in US-dollar terms in 2018 (as proxied by the MSCI Japan Index).

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