Listed ‘smart beta’ products are on the rise globally, according to a new report by research house Morningstar.
Morningstar says the over the 12 months to June 30, 2015, the listed smart beta fund market has grown faster than the traditional cap-weighted exchange-traded product (ETP) business “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,” the report says.
Smart beta, which Morningstar redubs ‘strategic beta’ in the study, is defined in the study as a broad range of indexes and ETPs that “enhance returns or minimize risk relative to a traditional market-capitalisation-weighted benchmark”.
“These benchmarks and the investable products that track them exploit many of the same ‘factors’ (size, value, quality, momentum, and so on) or to mitigate risk in a manner similar to active managers,” the Morningstar report says.
“This group represents a middle ground on the active/passive spectrum—deviating from a traditional strictly passive market portfolio, but doing so in a rules-based, transparent, and relatively low-cost manner.”
Based on the Morningstar definition, which excludes certain leveraged and option-based strategies, the smart beta market globally hit almost US$500 billion spread across 844 ETPs as at June 30 this year.
According to the latest BlackRock ‘ETP Landscape’ report, the total global ETP market reached over US$2.85 trillion and more than 5,700 product as at the end of August.
Morningstar says while smart beta ETPs were increasingly popular in all jurisdictions it covered, the trend was more apparent in larger, developed markets.
“For example, strategic-beta ETPs accounted for 21.2% of U.S. ETP assets but just 2.9% of ETP assets in the Asia-Pacific region,” the report says.
Australia was the most advanced smart beta ETP market in the Asia-Pacific region, Morningstar says, with seven products in that category launched in that category over the 12 months to June 30, 2015, alone.
“On our count, there are now 124 ETPs in Australia, 16 of which we classify as strategic beta,” the study says. “Those 16 ETPs account for $1.2 billion, or 8.2% of Australia’s $14.1 billion ETP market (as of 30 June 2015).”
According to the Morningstar report, the most popular smart beta ETPs globally were dividend-screening products – which amp up exposure to high-yield stocks.
“This should come as little surprise when considered in the context of the prevailing interest-rate environment,” Morningstar says. “Investors around the globe have piled into dividend-paying equities, shunning the low (or negative) real yields offered by issues from developed-markets sovereigns.”
Despite the rapid growth in variations of smart beta ETPs, the report says there could soon be a “culling of the herd” and fee pressure as competition in the space increased.
“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),” Morningstar says. “That said, in many cases they take a toll many multiples of that levied by their more ordinary passive peers.”
The report titled ‘A global guide to strategic-beta exchange-traded products’ was Morningstar’s second annual report on the sector.