A Global Guide to Strategic-Beta Exchange-Traded Products - 2016

Third annual global guide to strategic-beta ETPs; Grown more rapidly than the broader ETP market

Morningstar ETF analysts 15 September, 2016 | 10:17
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Our global team of ETF and passive fund analysts published “A Global Guide to Strategic-Beta Exchange-Traded Products,” its third annual global landscape report about trends in strategic-beta exchange-traded products (ETPs). The full report can be downloaded here.

Executive Summary

  • Two years ago, we introduced our naming convention and taxonomy for the fast-growing universe of strategic-beta exchange-traded products, or ETPs. In this year’s guide, we provide an update on the state of the global strategic-beta ETP landscape.
  • In recent years, the space has grown more rapidly than the broader ETP market as well as the asset management industry as a whole.
  • 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.
  • 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.
  • As of June 30, 2016, there were 1,123 strategic-beta ETPs, with collective assets under management of approximately $550.5 billion worldwide.
  • Dividend-screened/weighted ETPs continue to be the most popular grouping of strategic-beta ETPs in all but one region we examined. This should come as little surprise when considered in the context of the prevailing interest-rate environment.
  • Low-volatility/minimum variance ETPs have surged in popularity. As of the end of June 2016, we counted 61 such ETPs worldwide, with collective assets under management of $47.5 billion.
  • The pace of new product launches has accelerated to record levels. The number of strategic-beta ETPs listed globally increased by more than 23% versus June 2015. This is owed in large part to a record number of new launches in the United States, driven by a combination of new entrants and strategy proliferation.
  • A commonality among the markets we examined is the increasing complexity of the benchmarks underlying new ETPs.
  • 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.
  • An increasingly crowded and competitive landscape will also put pressure on fees. We have already seen instances of aggressive fee reductions for strategic-beta ETPs. We anticipate that cost-competition in this space will become more prominent in the years to come.


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Strategic Beta in Asia-Pacific
Strategic-beta ETPs in the Asia-Pacific region had another year of strong growth in the 12-month period ended June 2016. Collective assets under management climbed 47.5%, to $10.5 billion from $7.1 billion. This compares with the near-doubling they experienced during the 12-month period ended June 2015. As was the case in the period ended June 2015, this growth was narrowly distributed. Strategic-beta ETPs in Taiwan grew the most in percentage terms (90%), while assets in Japan-domiciled ETPs grew the most in absolute terms ($3.0 billion). Assets under management in Japan-domiciled strategic-beta ETPs expanded 71% during the 12 months ended June 2016. This marks a sharp deceleration versus the 318% expansion they experienced in the 12-month period ended June 2015. New Zealand and South Korea also saw some noticeable growth in assets invested in locally domiciled strategic-beta ETPs. These countries’ strategic-beta ETP universes grew 89% and 35%, respectively.

The strong growth in strategic-beta ETPs in Japan has been primarily driven by government initiatives. In April 2014, the Government Pension Investment Fund added the JPX-Nikkei Index 400 to its passive mandate, and the Bank of Japan subsequently made ETFs tracking the JPX-Nikkei Index 400 eligible for purchase under its quantitative and qualitative monetary easing. The amount of annual ETF purchases was increased to JPY 3 trillion in October 2014 from the original JPY 1 trillion when the program began. The growth was further strengthened by the BOJ’s decision in December 2015 to establish a new program for purchasing ETFs at an annual pace of about JPY 300 billion from April 2016 whereby the BOJ is to purchase ETFs composed of stocks issued by firms that are proactively making investments in physical and human capital. The new program started with purchases of ETFs that track the JPX-Nikkei Index 400. During the period from April-June 2016, a number of additional ETFs that are consistent with the objectives of this measure were launched in the Japanese market. This key driver of growth in the local Japanese market is expected to accelerate further as the BOJ announced in July 2016 that it would double its rate of ETF purchases to an annual pace of JPY 6 trillion ($59 billion) as part of its effort to expand monetary stimulus.

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Given the initiatives outlined above, it is no surprise that Japan remains at the top of the Asia-Pacific league tables in terms of asset under management. Japan is followed by Australia, which has held on to its second position within the region. South Korea experienced significant growth in the 12-month period ended June 2016 and maintained its third-place position. This year, we included New Zealand in our study and found that strategic-beta ETP assets accounted for 12.2% of its local ETP market assets. Australia, another mature strategic-beta ETP market within the Asia-Pacific region, has strategic-beta ETP assets under management representing 8.4% of the local ETP market. Meanwhile, the figures for Japan and South Korea continued to expand, reaching 5.0% and 4.2%, respectively (compared with 3.6% and 3.8%, respectively, as of June 2015). Strategic-beta ETPs’ share of other Asia-Pacific markets remains low, ranging between 0.2% and 3.4%.

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The growth of the strategic-beta ETP market in the Asia-Pacific region was once again driven by strong inflows. The lion’s share of net new inflows went to Japan-domiciled ETFs tracking the JPX-Nikkei Index 400. In the 12 months to June 30, 2016, $4.2 billion of net inflows went into strategic-beta ETPs (excluding those domiciled in China), of which 58% came from quality strategies (mainly from ETPs tracking the JPX-Nikkei Index 400). Meanwhile, the number of strategic-beta ETPs grew to 117 from 84 during the same period (again, excluding those domiciled in China, or to 130 from 98 including those domiciled in China).

Growth in assets under management in Asia-Pacific strategic-beta ETPs outpaced that experienced by the broader Asia-Pacific ETP industry. As such, strategic-beta ETPs’ share of the overall ETP marketplace has climbed to approximately 3.5% as of June 2016 from 2.9% as of June 2015.

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Quality Reigns
ETPs tracking quality-oriented benchmarks remain the largest subcategory of strategic-beta ETPs in the Asia-Pacific region. The 14 quality-oriented ETPs listed in the region (eight of which are domiciled in Japan) have collective assets under management of $5.9 billion, accounting for 56% of total strategic-beta ETP assets in the region. ETPs tracking the JPX Nikkei Index 400 continue to dominate the list of the top 10 largest ETPs by assets, occupying six of the top 10 positions. Dividend-screened/weighted strategies are the second-largest sub-category of strategic-beta ETFs, accounting for 19% of the region’s total strategic-beta ETP assets. As of June 30, 2016, there were 33 dividend-screened/weighted ETPs in the region, making this group the most popular type of strategic-beta ETP by number.

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