【Morningstar】A Global Guide to Strategic-Beta Exchange-Traded Products

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Executive Summary

In September 2014, Morningstar introduced its naming convention and taxonomy for the fastgrowing universe of strategic-beta exchange-traded products, or ETPs. In this year’s guide, we provide an update on the state of the global strategic-beta ETP landscape, framed using our updated strategic-beta and index attributes, which were launched in Morningstar’s global database in the fourth quarter of 2018. Over the past decade-plus, the strategic-beta space has grown more rapidly than the broader ETP market. 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. New product launches have dwindled, and fees have come under pressure.

The coronavirus crisis has roiled markets. This episode reinforced important lessons about strategicbeta approaches to portfolio construction and taught some new ones about how these products perform in stressed markets. Strategic beta is an active approach to portfolio construction. Strategicbeta 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.

Key Takeaways

x As of Dec. 31, 2019, there were 1,422 strategic-beta ETPs worldwide, with collective assets under management of approximately $1.09 trillion.

x 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%.

x Strategic-beta ETPs amassed $93.2 billion in net new cash flows, translating into organic growth of 11.6%.