A Global Guide to Strategic Beta Exchange-Traded Products

The report is split into three acts: 1. The global strategic beta ETP landscape; 2. The origin of strategic beta; and 3. A guide to analyzing strategic beta ETPs.

Morningstar ETF analysts 22 September, 2014 | 8:30
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Our global team of ETF and passive fund analysts published “A Global Guide to Strategic Beta Exchange-Traded Products”. The full report can be downloaded here.

Recent discussions on the topic of “Strategic Beta” can be found here:
A Sensible Approach to ‘Smart Beta’ (Part 1)
A Sensible Approach to ‘Smart Beta’ (Part 2)
How Strategic Beta Can Factor Into a Diversified Portfolio

Executive Summary

  • “Smart beta” is an unfortunate name, one that has positive connotations that may not always be warranted.
  • What Morningstar deems “strategic beta” is a broad and rapidly growing category of benchmarks and the investment products that track it.
  • As of June 30, 2014, there were 673 strategic beta exchange-traded products, or ETPs, with collective assets under management of approximately $396 billion worldwide1.
  • Strategic beta ETPs are making inroads against their peers that are benchmarked to more-traditional indexes. While their market share has been increasing in every region we have examined, they have made greater inroads in large, more mature markets than they have in smaller, less developed ones. For example, strategic beta ETPs accounted for 19% of U.S. ETP assets, but just 1.5% of ETP assets in the Asia-Pacific region.
  • The common thread among strategic beta investment products is that they seek to either improve their return profile or alter their risk profile relative to more-traditional market benchmarks.
  • As new products have continued to roll off asset managers' assembly lines, their sales and marketing departments have been working tirelessly to position these new models in an increasingly competitive field.
  • The result has been a ratcheting up of the level of complexity of the indexes that underlie these benchmark-based investment products and, in some cases, a growing disparity between how they are pitched by their sponsors and the actual investment results they produce.
  • The need to define this space, to measure it, and to police it has grown and will continue to grow with time.
  • At Morningstar, we are positioning ourselves to meet these needs, with the goal of helping investors make better-informed investment decisions.
  • This report is split into three “acts.” In the first act, we examine the global strategic beta ETP landscape, looking at trends in asset growth, asset flows, product development, and fees on a region-by-region basis. In the second act, we discuss the “origins” of strategic beta, looking at the various types of risk that these strategies look to harness and how they manifest themselves in an investment context. Finally, in the third act, we provide a practical guide to analyzing strategic beta ETPs through a number of different lenses that will help investors to make more informed decisions when considering these products.



Strategic Beta in Asia-Pacific
Strategic beta ETPs in the Asia-Pacific region have a less-than decade-long history, a lot shorter than that of the U.S. The region’s first strategic beta ETP (one benchmarked to a dividend-screened/weighted index) was launched in China by Huatai-PineBridge in November 2006. During the past seven years, the offerings on the strategic beta ETP menu have expanded to include other return- and risk-oriented strategies and have become available across many of the other Asia-Pacific markets, including India, which recently launched its first strategic beta ETP--a dividend-screened/weighted fund.

The growth of the Asia-Pacific strategic beta ETP market was at first driven by the introduction of strategic beta ETPs across different markets and subsequently by the expansion of the menu of offerings within those markets as well as net inflows into a select number of products. Over the 12 months ended June 30, 2014, assets under management in these products (excluding those domiciled in China) grew 50%, of which 33 percentage points came from net inflows. The number of strategic beta ETPs (again, excluding those domiciled in China) grew to 52 from 42 during that same span.

As of June 30, 2014, total net assets across the 67 strategic beta ETPs in the Asia-Pacific region amounted to $2.8 billion, representing 1.5% of the total ETP assets in the region. Among the Asia-Pacific ETP markets, Australia stands out, as it is home to the largest amount of strategic beta ETP assets, accounting for 39% of Asia Pacific’s total, distributed among nine strategic beta ETPs. Australia is followed by China (26% of assets, 15 ETPs) and South Korea (16% of assets, 25 ETPs). With 25 ETPs, South Korea has the most strategic beta ETPs in the Asia-Pacific region. It is also the region’s most diverse menu of strategies, including more-traditional strategies, such as dividend screened/weighted, as well as newer generations of strategies, such as multiasset and low/minimum volatility/variance.

Summing up, Australia stood as a more mature strategic beta ETP market in terms of adoption, with collective strategic beta ETP AUM representing 9.9% of the total ETP market. At 9.9%, this figure is below that of the U.S. (19.3%) and Canada (11.3%). It’s comparable to that of the U.S. a decade ago and is much higher than the level of Europe (4.5%). The other countries’/regions’ collective strategic beta ETP AUM accounted for only 0.1%-3.0% of total assets of their respective ETP markets. In terms of product offerings, the Asia-Pacific region appeared to be inferior to the U.S. and Europe when it comes to the number of products available and the diversity, with Asia-Pacific strategic beta ETPs highly concentrated in divided-screened/weighted strategies (68%). In fact, dividend-screened/weighted strategies attracted the most assets in every market and the majority of the net inflows (excluding China’s) in the past 12 months went into the dividend-screened/weighted products. Moreover, strategic beta ETPs tend to be small, with average asset size of US$42 million. Furthermore, ETPs tend to focus their exposure in their respective local equity markets. Learning from the experience of the U.S. and Europe, we believe there is a lot of room for growth for strategic beta ETPs as the various markets further develop and as investors further understand the pros and cons of these products. 

1 All monetary figures throughout this report are expressed in U.S. dollars unless otherwise stated.


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