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Morningstar says smart beta ETFs experienced ‘lacklustre showing’ during market downturn


Morningstar’s Director of Global ETF Research, Ben Johnson has commented on his team’s latest report, “A Global Guide to Strategic-Beta Exchange-Traded Products,” which found that as of 12/31/19, there were 1,422 strategic-beta ETPs worldwide, with collective assets under management of approximately USD1.09 trillion.

Johnson writes that the space is maturing as the pace of new product launches are slowing and fee competition is intensifying. “The crowded and competitive landscape will only continue to put downward pressure on fees” he says.

The report says: “Strategic-beta products had a general lacklustre showing amid the market downturn, reinforcing important lessons about how these products approach portfolio construction. Most US listed strategic-beta ETPS underperformed their respective category indexes during the first five months of 2020. Every group (except commodities) performed worse, on average, than their category index.

“The benchmarks underlying new strategic-beta ETPs keep getting more complex. As more traditional, broad-based market-cap-weighted exposures and single-factor ETPs have proliferated, ETP providers have introduced more multifactor ETPs, factor-timing products, and new variants of single-factor exposures.”

The report found that by the end of June 2020, strategic-beta ETPs numbered 632 and had collective assets of USD869.7 billion, representing roughly 20 per cent of the USD4.38 trillion invested in ETPs.

“This swift growth has been driven primarily by new adopters across the investor spectrum, ranging from individuals to central banks. Approximately 72 per cent of the aggregate growth in strategic-beta ETP assets over the past two decades has come from net new inflows; the remaining 28 per cent reflects asset appreciation.

“As asset managers rushed to fill out their suite of factor ETFs, investors were overwhelmed with choice, and the market became oversaturated. In 2019, closings of strategic-beta ETPs outnumbered new launches for the first time. During the first half of 2020, there were more than six times as many strategic-beta ETPs pulled from the menu than there were new additions.”

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