“Smart beta” might sound appealing, but its implications aren’t always guaranteed. What Morningstar calls “strategic beta” encompasses a wide and rapidly expanding universe of benchmarks and the investment products that track them. This article serves as A Global Guide To Strategic Beta Exchange Traded Products, providing essential insights for investors.
As of June 30, 2014, there were 673 strategic beta exchange-traded products (ETPs) worldwide, with approximately $396 billion in assets under management. These strategic beta ETPs are increasingly competing with traditional index-based products.
Strategic Beta ETPs: A Global Overview
Strategic beta ETPs are gaining traction, especially in larger, more established markets. For instance, they represent 19% of U.S. ETP assets but only 1.5% in the Asia-Pacific region. The primary goal of these investment products is to enhance return profiles or adjust risk profiles relative to conventional market benchmarks.
As asset managers introduce new products, their marketing efforts intensify, leading to more complex underlying indexes. In some cases, there’s a growing gap between how these products are marketed and their actual performance. The need for clear definition, measurement, and oversight in this area is increasingly important.
Morningstar aims to address these needs, assisting investors in making informed decisions. This guide provides a comprehensive look at the strategic beta ETP landscape.
Strategic Beta in Asia-Pacific: A Closer Look
Strategic beta ETPs in the Asia-Pacific region have a relatively short history, less than a decade compared to the U.S. The first strategic beta ETP, benchmarked to a dividend-screened/weighted index, was launched in China by Huatai-PineBridge in November 2006. Since then, the offerings have expanded to include various return- and risk-oriented strategies, available across markets like India, which recently launched its first dividend-screened/weighted strategic beta ETP.
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The growth in the Asia-Pacific strategic beta ETP market has been driven by the introduction of these ETPs in new markets, the expansion of offerings within those markets, and net inflows into specific products. In the 12 months leading up to June 30, 2014, assets under management (excluding China) grew by 50%, with 33 percentage points attributed to net inflows. The number of strategic beta ETPs (excluding China) increased from 42 to 52 during the same period.
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As of June 30, 2014, total net assets across the 67 strategic beta ETPs in the Asia-Pacific region reached $2.8 billion, representing 1.5% of the total ETP assets in the region. Australia leads the way, holding the largest share of strategic beta ETP assets, accounting for 39% of the Asia-Pacific total, distributed among nine ETPs. China follows with 26% of assets and 15 ETPs, and South Korea with 16% of assets and 25 ETPs.
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South Korea offers the most diverse range of strategies, including traditional dividend-screened/weighted approaches and newer strategies like multiasset and low/minimum volatility/variance.
Australia stands out as a more mature strategic beta ETP market, with strategic beta ETP AUM representing 9.9% of the total ETP market. This figure is lower than the U.S. (19.3%) and Canada (11.3%) but comparable to the U.S. a decade ago and much higher than Europe (4.5%). Other countries in the Asia-Pacific region have strategic beta ETP AUM accounting for only 0.1%-3.0% of their respective ETP markets’ total assets.
The Asia-Pacific region appears less developed than the U.S. and Europe in terms of product offerings and diversity, with a high concentration in dividend-screened/weighted strategies (68%). These strategies also attracted the most assets and net inflows (excluding China) in the past year. Strategic beta ETPs tend to be small, with an average asset size of US$42 million and focus on local equity markets.
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Strategic Beta ETPs: Room for Growth
Drawing on the experiences of the U.S. and Europe, there is substantial potential for strategic beta ETPs to grow as these markets develop and investors gain a deeper understanding of the advantages and disadvantages of these products. The future of a global guide to strategic beta exchange traded products lies in educating investors and promoting informed decision-making.
1 All monetary figures throughout this report are expressed in U.S. dollars unless otherwise stated.
