Despite the growing variety of strategic beta funds, investors are preferring plain vanilla growth and value funds above all others, according to Ben Johnson, director of Global ETF Research.
Morningstar characterizes market-cap weighted growth and value index funds as strategic beta, unlike other firms who include only funds that take into account factors like size, value and volatility and are not cap-weighted; they usually refer to those funds as smart beta.
Morningstar’s data shows that strategic beta assets have grown 27% year over year through the end of September to $652 billion, driven by both new asset flows and market appreciation. The share of new flows dedicated to strategic beta, however, declined to 11.5% during the first nine months of this year compared with the same period a year ago, according to Morningstar.
“Strategic beta is a new form of active management” that costs less and has significantly more tax advantages than traditional funds because of the in-kind redemption mechanism, says Ben Johnson, director of Global ETF Reserch. (When ETF shares are redeemed, the ETF issuer doesn’t have to sell stock to pay the authorized participant, who has obtained the underlying assets needed to create the ETF. The ETF issuer can pay with the underlying holdings of the ETF, and thus avoid a taxable event.)
Moreover, strategic beta fund costs have been declining. Since late June, Guggenheim cut the fee for its equally weighted S&P 500 fund (RSP) from 40 basis points to 20, PowerShares introduced an S&P Minimum Variance ETF (SPMV) charging 13 basis points and Goldman Sachs underpriced them all with the launch of its equally weighted U.S. large cap equity ETF (GSEW) for a cost of just 9 basis points.
Johnson expects the decline in fees will continue.
The latest Schwab ETF investor study showed that three in 10 investors are using strategic beta funds, with millennials their most avid investors, and that two-thirds of investors reducing their shares of actively managed funds are reinvesting those funds in smart beta products.