Is Factor Investing Interest Hitting a Peak?

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.