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Portfolio > ETFs > Broad Market

Is Factor Investing Interest Hitting a Peak?

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Strategic-beta exchange-traded products have grown faster than the broader ETP market in the last few years but may be hitting adulthood, says Morningstar in its Global Guide to Strategic-Beta Exchange-Traded Products. Although strategic-beta ETPs still are gaining market share, “the pace of their gains has decelerated,” states the report. Two likely reasons for this maturing: a drop in the pace of new product launches and intensifying fee competition.

The study found that there were 1,493 strategic beta ETPs worldwide, with assets of $797 billion. Although these products grew 0.5% from 2017, this growth was “muted” by the fourth quarter market volatility. That said, organic growth was almost 11% in 2018, in which there was an $87 billion in net new cash flows.

The study also found that in 2018, there were 132 new strategic-beta ETP product launches versus 257 introduced in 2017. This indicates a saturation in this area, the report states.

In addition, fees have been pressured downward due to a crowded and competitive field, states Morningstar. “We question how long providers will be able to justify premium pricing for these funds, as we have already seen instances of aggressive fee reductions for strategic-beta ETPs,” the report states. They see this cost competition becoming more intense going forward.

Two other points the study found. The proliferation of broad-based market-cap-weighted exposures single-factor ETFs, has “led providers to launch more multifactor ETPs and factor-timing products.” Also, the increased number of “methodology changes to the indexes underpin these funds, which further blurs their status on the active-to-passive continuum.”

The study also found that low-volatility ETPs gained market share in the United States, Europe and Canada. Not surprisingly, investors looked for “less risky ways to maintain equity exposure,” and funds that belong to Morningstar’s risk-oriented strategic-beta group brought in $12 billion in net new cash flows.

Finally, another finding was the positive relationship between adoption of strategic-beta ETPs and the age of a region’s ETP market, or its asset management and financial services industries. For example, where the United States has a large and mature asset management industry, and the second oldest ETP market in the world, its strategic-beta ETPs account for 88% of total global market share in assets, according to the report.

FTSE Russell First Quarter Factor Performance

Separately, FTSE Russell released its first quarter U.S. factor performance highlights, in which it found that the market’s initial risk-on mood is evident in year-to-date factor data.

Also, since January, low volatility and yield factors lagged in the United States, which typically under perform when risk appetites are high.

Further, the size factor, which provides exposure to faster-growing more volatility small-cap stocks, was the top performer in the first quarter.

However, findings from FTSE Russell also found that more defensive quality and profitabilty factors “broadly outperformed” since January, “revealing undercurrents of investor unease in global economic  and earnings growth.”

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