Strategic beta may be past its prime.
According to a new report from Morningstar, more strategic beta exchange-traded products in the U.S. — primarily ETFs but also including exchange-traded notes (ETNs) — shuttered in 2019 than launched, and their performance during the first five months of this year was lackluster.
Thirty new strategic beta ETFs launched in the U.S. last year, 30% less than the year before and the lowest number since 2010, and 41 were closed. By year-end 2019, there were 639 U.S.-based ETPs with $960.6 billion in assets, and their market share, near 22%, was up just 1.2% from the prior year. Asset flows favored more traditional ETPs, according to Morningstar.
The performance of U.S. strategic beta ETPs, which account for 45% of the global number and 88% of the global assets, was also lackluster during the first five months of the year when the COVID-19 pandemic took hold. Every strategic beta category except commodities on average underperformed its category index.
Morningstar attributes the unimpressive performance to tilts toward smaller-cap stocks and lower valuations, which are most common in specific ETP category groups, namely dividend, fundamentals, multi-factor and value multi-factor and value groups. Small cap and value factors underperformed considerably during the first five months of the year.