New research by Morningstar indicates the sector is growing faster than the broader exchange-traded product (ETP) market and the asset management industry as a whole. Enhanced beta refers to passive products that track non-traditional indices – those not based on market capitalisation. They give exposure to other market factors such as dividends, earnings, low volatility or growth and value factors.
Just the beginning
Morningstar’s “Global Guide to Strategic-Beta Exchange-Traded Products” for 2015 shows that assets under management in global enhanced beta products grew by 25.2% in the 12 months to June. There was $497.3 billion invested in these products at end June this year, up from $397.3 billion in 2014.
Despite the different levels of uptake, there are, however, a number of common themes across the globe. The first is that dividend-screened or weighted strategies were most popular in all but one region examined.
“This should come as little surprise when considered in the context of the prevailing interest-rate environment,” Morningstar said. “Investors around the globe have piled into dividend-paying equities, shunning the low (or negative) real yields offered by issues from developed markets sovereigns.”
The study also found that in all regions, enhanced beta charged expense ratios that were more competitive than those charged by active managers. However, in some cases they charged fees much higher than traditional passive products.
Morningstar expects the rapid growth will begin to have an impact. “Growth and maturation will ultimately lead to a culling of the herd, which has already begun in some geographies, albeit to a limited extent,” the report says. “An increasingly crowded and competitive landscape will also put pressure on fees.”
A third common and significant trend is that the benchmarks tracked are becoming increasingly complex. While this gives investors greater choice and flexibility, it also means they have to be more aware of what they are buying.
This has been a concern in South Africa where many investors have been attracted to enhanced beta, based on the past performance of the underlying index. However, they haven’t examined how that performance was generated. When market cycles turn and the factors influencing performance change, investors have often been disappointed. This has underlined the need to appreciate what ivestors are buying and what factors will influence returns.
The report noted that South Africa has the largest enhanced beta offering amongst emerging markets. Enhanced beta funds in South Africa include the Satrix Divi Plus, Satrix Rafi 40, NewFunds S&P GIVI SA Top 50, NewFunds MAPPS Protect, NewFunds MAPPS Growth, CoreShares S&P SA Dividend Aristocrats, NewFunds S&P GIVI SA Financial 15, NewFunds Equity Momentum, NewFunds S&P GIVI SA Industrial 25, CoreShares S&P SA Low Volatility, and NewFunds S&P GIVI SA Resource 15.