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Strategic-Beta Products See Record Growth

Assets in strategic-beta exchange traded products grew 3% to $34.5 billion, with many Asia-Pacific markets recording growth in excess of 50%, Morningstar’s latest research finds.

Ruth Saldanha 14 July, 2020 | 23:38
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In 2019, strategic-beta exchange-traded products in the Asia-Pacific region recorded another year of strong growth in collective assets under management, with assets in strategic-beta ETPs growing 43% to USD 34.5 billion, Morningstar’s latest research funds. The growth was driven by a combination of double-digit market gains and net flows into new and existing products.

In Morningstar’s latest research titled A Global Guide to Strategic-Beta Exchange-Traded Products, authored by Morningstar researchers Alex Bryan, Jackie Choy, Kongkon Gogoi, Ben Johnson, and Kenneth Lamont, the authors find that through over the past decade-plus, the strategic-beta space has grown more rapidly than the broader exchange-traded product market, new product launches have dwindled, and fees have come under pressure. “Strategic-beta ETPs’ growth has been driven by new cash flows, new launches, and the entrance of new players. However, more recently, these products’ market-share gains have stalled. This market segment is showing signs of maturity,” the report finds. You can get a copy of the report here.

Strategic Beta in a Time of the Coronavirus
The authors acknowledge that the COVID-19 crisis has roiled markets.

“This episode reinforced important lessons about strategic-beta approaches to portfolio construction and taught some new ones about how these products perform in stressed markets,” the authors note.

Strategic beta is an active approach to portfolio construction. Strategic-beta ETPs’ performance through recent market volatility underscores the fact that—like discretionary active portfolios—no two of these products are created equal.

“Our analysis of their performance during the first five months of 2020 reveals the differences between them and emphasizes the importance of thorough due diligence when selecting from the strategic-beta ETP menu,” the report notes.

Global Strategic Beta
As of Dec. 31, 2019, there were 1,422 strategic-beta ETPs worldwide, with collective assets under management of approximately $1.09 trillion. Assets in these products grew 36.1% in 2019. Top-line growth was buoyed by rallying equity markets, as the Morningstar Global Markets Index gained nearly 27%. Strategic-beta ETPs amassed $93.2 billion in net new cash flows, translating into organic growth of 11.6%, the report notes, adding that the slowing pace of new product launches and intensifying fee competition are signs that the space is maturing. The number of strategic-beta ETPs increased just 1.2% in 2019.

In the United States, the number of new product launches was the lowest since 2010 and, for the first time ever, was eclipsed by the number of strategic-beta ETPs that were shuttered. This is clear evidence that the menu has been oversaturated. A crowded and competitive landscape will continue to put downward pressure on fees. Low-volatility ETPs continued to gain market share in the U.S., Europe, and Canada in 2019. 

Exhibit 1


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A Global Guide to Strategic-Beta Exchange-Traded Products

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About Author

Ruth Saldanha

Ruth Saldanha  is Senior Editor at Morningstar.ca


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