Morningstar has published the findings in its latest annual Global Guide to Strategic-Beta Exchange-Traded Products.
Strategic beta is an active approach to portfolio construction – Morningstar noted the ETP segment has grown more rapidly than the rest of the broader ETP market for the last decade, only now showing signs of maturity as new product launches dwindle and fees come under pressure.
But in Australia, strategic-beta ETPs recorded substantial growth last year, with assets rising by 64 per cent to US$4.9 billion ($7 billion).
The nation’s growth was greater than that of the global ETP market which had risen by 36.1 per cent.
The Australian market share thus hit a new high of 11.4 per cent.
Australia saw the greatest adoption in the Asia-Pacific region, being second in total assets behind Japan’s US$22.8 billion ($32.6 billion).
As at 31 December, there were 1,422 strategic-beta ETPs worldwide, with collective assets under management of around US$1.09 trillion.
The number of new products increased globally by just 1.2 per cent – with new product launches being the lowest since 2010 in the US, eclipsed by the number of strategic-beta ETPs that were shuttered.
Meanwhile active ETP assets more than doubled in Australia, landing at US$3.9 billion.
But passive ETFs still made up the bulk of the US$42.9 billion Australian ETP market, with US$31 billion in assets.
Assets invested in non-traditional ETPs, such as derivative income, dividend stripping and leveraged/inverse equity funds grew by 64 per cent and totalled US$3.2 billion as at the end of 2019.
In Australia, there were 33 strategic-beta ETPs. Three new products were launched during 2019.
VanEck sat on top of the Australian strategic-beta ETP issuer league table. The firm had US$1.8 billion invested in its strategic-beta ETPs as at the end of 2019, which represented a 37 per cent market share.
Vanguard followed in second place, due to the US$1 billion invested in its strategic-beta offering in the local market.
Morningstar noted fees levied by strategic-beta ETPs in Australia are competitive with active funds, but they “remain significantly higher than those charged by plain-vanilla index trackers”.
“For example, strategic-beta ETPs within the Australia large blend equity Morningstar category charge an [asset-weighted] average expense ratio of 0.31 per cent,” the report stated.
“The fee taken by non-strategic beta ETPs in the same category averaged 0.15 per cent.”
The research also stated the benchmarks underlying the strategic-beta ETPs are becoming more complex.
“As more traditional, broad-based market-cap-weighted exposures and single-factor ETPs have proliferated, ETP providers have introduced more multifactor ETPs, factor-timing products, and new variants of single-factor exposures,” Morningstar stated.
“As these strategies become more complicated, the due-diligence burden on investors increases.”
As for their performance, the report deemed the products were “generally lacklustre” through the first five months of 2020.
“The bets many of them tend to make on smaller companies with lower valuations weren’t rewarded during this period,” the white paper stated.
Sarah Simpkins
Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth.
Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio.
You can contact her on [email protected].
