September 7, 2017

Morningstar Publishes Annual Global Guide to Strategic-Beta Exchange-Traded Products and an In-Depth Examination of the Performance of Strategic-Beta ETFs

New research discovers strategic-beta funds are not as distinctive as advertised; market-cap-weighted alternatives may capture same performance drivers at a lower cost

CHICAGO, Sept. 7, 2017 /PRNewswire/ -- At its eighth annual ETF Conference, Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, today published its annual global landscape report, "A Global Guide to Strategic-Beta Exchange-Traded Products," and a complementary examination of the performance of U.S. strategic-beta equity exchange-traded funds (ETFs). The landscape report examines trends in asset growth, asset flows, product development, and fees among strategic-beta exchange-traded products (ETPs) by region, while the performance study takes an in-depth look at these funds' performance compared to replicating portfolios made up of market-cap-weighted indexes.

"With our fourth annual strategic beta landscape report, we want to help investors better define, measure, and analyze this diverse group of nuanced products," said Ben Johnson, CFA, Morningstar's director of global ETF and passive strategies research. "In the years to come, an increasingly crowded and competitive landscape will put pressure on fees. It remains to be seen whether incumbents' fees will face pressure from competitors, investors, or both."

Key highlights of the landscape report include:

  • As of June 30, 2017, there were 1,320 strategic-beta ETPs, with collective assets under management of approximately $707 billion worldwide. Assets in these products grew 28.4 percent relative to their June 30, 2016 level.
  • The number of assets and funds has grown more rapidly than the broader ETP market as well as the asset-management industry. There were 204 new strategic-beta ETPs brought to market in the 12 months through June 2017, down slightly from 211 during the prior period. More strategic-beta ETPs were introduced in Europe than all other regions combined.
  • Morningstar has assigned Morningstar Analyst Ratings™ to 119 strategic-beta ETPs worldwide since November 2016. These funds collectively held more than $495 billion in investors' money as of June 30, 2017—representing 70 percent of the total amount invested in strategic-beta ETPs around the globe.
  • The fees levied by strategic-beta ETPs are, on average, competitive with those charged by the universe of ETPs ex-strategic beta.

Morningstar's Strategic Beta Performance Replication Study challenges some strategic-beta funds' pricing by attempting to determine whether it is possible to replicate strategic-beta equity funds' performance with various combinations of market-cap-weighted alternatives.

"Strategic-beta funds aren't as distinctive as they may first appear. It's possible to replicate most of their performance with size and value exposures that simple cap-weighted indexes can offer, suggesting that most of these funds just repackage market risk," said Alex Bryan, CFA, director of passive strategies research, North America. "Investors shouldn't pay significantly higher fees for these strategies than market-cap-weighted alternatives, which capture the same performance drivers and can replicate most of their returns."

The study found that many strategic-beta funds are still worth investing in, even if their merits are sometimes exaggerated, as a large minority of strategic-beta funds did outperform their replicating portfolios. Additionally, the report found it is more efficient to purchase a strategic-beta fund than trying to reassemble its factor exposures, which often shift over time. The case for strategic-beta funds is also stronger in foreign markets, where they may offer the most cost-efficient way to obtain certain style tilts given the dearth of market-cap-weighted value and growth index alternatives.

To access Morningstar's Global Guide to Strategic-Beta Exchange-Traded Products, please click here. To access the strategic beta performance replication study, please click here.

About Morningstar, Inc.

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offers an extensive line of products and services for individual investors, financial advisors, asset managers, retirement plan providers and sponsors, and institutional investors in the private capital markets. Morningstar provides data and research insights on a wide range of investment offerings, including managed investment products, publicly listed companies, private capital markets, and real-time global market data. Morningstar also offers investment management services through its investment advisory subsidiaries, with more than $200 billion in assets under advisement and management as of June 30, 2017. The company has operations in 27 countries.

Morningstar's Manager Research Group consists of various wholly owned subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC. Analyst Ratings are subjective in nature and should not be used as the sole basis for investment decisions. Analyst Ratings are based on Morningstar's Manager Research Group's current expectations about future events and therefore involve unknown risks and uncertainties that may cause such expectations not to occur or to differ significantly from what was expected. Analyst Ratings are not guarantees nor should they be viewed as an assessment of a fund's or the fund's underlying securities' creditworthiness. The Analyst Rating methodology for ETFs is available here.

©2017 Morningstar, Inc. All Rights Reserved.

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Mary Kenefake, +1 312 348-3089 or mary.kenefake@morningstar.com

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