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Smart beta outgrows plain-vanilla ETPs

Total assets in European smart beta products grew by 25% in the 12 months to the end of June to a record $40bn (€35.8bn), Morningstar has found. The market share of smart beta in the total ETP-market consequently grew to 7.5% from 6.3%, as plain-vanilla index trackers have been suffering some outflows.

Morningstar noticed a “relentless march of new product launches”, with multi-factor funds especially popular. “These funds have become a way for ETP providers to differentiate their product offerings and maintain profit margins,” according to the research house.

However, a simpler explanation for their popularity is that most fund selectors do not trust themselves rotating between different factors. Instead, they want a product that does this for them. According to earlier research by FTSE Russell, usage of multi-factor strategies has doubled this year. This chimes with Morningstar’s finding that its market share has grown from 7% to 13% in just a year’s time.

Almost all the new launches track equity indices, and the smart beta fixed income space remains conspicuously empty for now, even though there is certainly demand for such products as investors are making efforts to remodel their strategic fixed income portfolios.  

Despite the rise of multi-factor ETFs, dividend/weighted strategies continue to dominate the European market, with a market share of 43%. Low volatility strategies are in second place with a market share of 19%.

iShares rocks

iShares remains the undisputed market leader in smart beta with a market share of 44%, which is pretty similar to its overall position in the ETP market. iShares is almost nine times as large as its nearest competitor, SPDR.

Despite this dominance by one player, Morningstar expects fees to fall further, following the entry of Vanguard to the European market. The American asset manager offers exposure to a range of factors for a fee of just 0.22%.

According to Morningstar, the only reason fees didn’t fall this year is that relatively expensive multi-factor ETFs have become more popular. The average smart beta equity fund fee is now 0.39%, compared to 0.31% for plain vanilla ETFs.

Part of the Mark Allen Group.