The party is over for Strategic Beta products

A Morningstar report on the state of the global strategic-beta exchange-traded products (ETP) landscape.
By Morningstar |  29-07-21 | 

Over most of the past decade, the strategic-beta space grew more rapidly than the broader ETP market as products made inroads against their peers that are benchmarked to more-traditional indexes.

Strategic-beta ETPs’ growth was driven by new cash flows, new launches, and the entrance of new players. However, more recently, these products’ market-share gains have stalled. In 2020, they lost market share across each of the major regions we examined.

The party ends

Flows have fizzled. The number of strategic-beta ETPs declined for the first time ever in 2020 as closures outnumbered new launches. Fees have been squeezed.

The slowing pace of organic growth, the year-over-year decline in the number of products on the menu, and unrelenting fee competition are signs that the space has reached full maturity.

Not only has this segment lost market share, but also mind share. What has gained in traction is Environmental, Social and Governance (ESG) investing; actively managed exchange-traded funds (ETFs); and thematic funds.

  • As of December 31, 2020, there were 1,367 strategic-beta ETPs worldwide, with collective assets under management of approximately $1.22 trillion.
  • Assets in these products grew 12.2% in 2020. Top-line growth was bolstered by buoyant equity markets.
  • Strategic-beta ETPs amassed $28.2 billion in net new cash flows, translating into organic growth of 2.6%, marking a sharp deceleration.
  • The number of strategic-beta ETPs listed worldwide fell 2.9% in 2020.

The U.S. is home to the largest and most diverse stable of strategic-beta ETPs. The U.S. market accounts for 45% of the total number of strategic-beta ETPs, which together account for 88% of global assets. This should come as little surprise given the overall size and maturity of the U.S. asset-management and financial-services industries.

The first generation of strategic-beta ETPs came to the U.S. market in May 2000. IShares Russell 1000 Growth ETF IWF and iShares Russell 1000 Value ETF IWD were not only the first but also are presently two of the five largest strategic-beta ETPs. These funds represented “first-generation” strategic beta, introducing systematic style tilts to a market that was already well-versed in a style-based approach to equity investing.

In the U.S., the number of new product launches in 2020 (21) was the lowest since 2009 (7) and was outnumbered 2.5x by the number of strategic-beta ETPs that were shuttered (73). This is clear evidence that this market has been oversaturated.

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