Smart Beta’s ETF Domination

With nearly $500 billion already under management, smart beta indices are becoming a more dominant part of the exchange-traded universe, according to Morningstar.

Smart beta is outgrowing not only the global asset management industry, but also the exchange-traded product (ETP) space, according to Morningstar.

The research firm reported 844 global smart beta ETPs collectively representing nearly $500 billion in assets as of June 30, 2015. This was a significant increase from 673 ETPs representing just $396 billion in 2014.

“This process of growth and maturation will ultimately lead to a culling of the herd.”The growth is “driven by new inflows, new product launches, and the entrance of new providers during the past year,” Ben Johnson, Morningstar’s director of global exchange-traded funds research, said.

Smart beta ETPs also accounted for more than one-fifth of all US ETP assets, the research said. The US was also host to more than half of all smart beta indices, which together accounted for 91% of total assets.

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As smart beta continues to balloon, Johnson said the strategies and the benchmarks underlying new ETPs are becoming more complex.

“This is part of the natural evolution of the market and one that has already played out in the slicing and dicing of traditional market-capitalization-weighted exposures along the lines of region, sector, sub-sector, and so on,” the report said.

And Johnson warned that as smart beta ETPs become “increasingly nuanced,” particularly as more and more traditional active managers join the trend, investors would face an even greater burden of due diligence. 

However, US investors’ preferences in smart beta ETPs remained “fairly plain vanilla” despite rising complexity, Morningstar found. Products with exposures to more straightforward strategies including value and growth accounted for some 70% of total smart beta ETP assets.

The hyper-competitive smart beta space has also led to an increase in pressure on fees, Morningstar said. 

Although smart beta ETPs tend to charge fees that are already “more competitive than their comparable actively-managed peers,” the firm said it anticipated aggressive fee reductions in the future.

“This process of growth and maturation will ultimately lead to a culling of the herd, which has already begun in some geographies, albeit to a limited extent,” Morningstar concluded.

Morningstar Smart Beta ETFs 

Related: Smart Beta’s Takeover; Smart Beta’s Google Problem; The Faltering Case for Active ETFs