Smart beta funds stuck in a rut: report

By James Langton | July 14, 2020 | Last updated on July 14, 2020
2 min read
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Strategic beta funds have grown in lock step with the broader exchange-traded product (ETP) market in Canada, but they haven’t made inroads lately in terms of market share, according to Morningstar Inc.

Strategic beta ETPs — also known as “smart beta” — typically seek to enhance returns, lower risk or provide exposure to specific strategies (such as value, momentum and volatility) compared with traditional broad indexes.

According to a new Morningstar report, assets devoted to strategic-beta ETPs in Canada have grown substantially since 2007, and the number of funds has jumped too.

Yet, the market share for these sorts of products has been stalled at about 10% of the overall ETP market (in asset terms) in Canada since 2014, the report said.

In that time, there have been almost 100 strategic beta ETPs launched in Canada, bringing the total universe to 157 funds.

“Since these funds express active bets relative to the market, many investors wait until these funds have established a multiyear record of success before investing, much as they tend to treat actively managed funds,” the report said.

The same sort of trends are evident at the global level — continued growth in assets, but stagnant market share — the report noted.

“This market segment is showing signs of maturity. New product launches have dwindled, and fees have come under pressure,” the report said.

“A crowded and competitive landscape will continue to put downward pressure on fees,” it added.

The sorts of funds that have found success with Canadian investors tend to be ones that seek specific outcomes, such as dividend income, the report said.

“Dividend strategies are far away the most popular type of strategic-beta ETP by assets,” it said, noting that they accounted for about 40% of assets in the segment at end of 2019.

“That’s not surprising. Many investors, particularly retirees, love income and funds that can deliver it,” the report said.

The other big category in Canada is funds that aim to provide lower volatility.

“Unlike the U.S. market, broad, market-cap weighted value, and growth funds don’t attract much money here,” the report said.

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James Langton

James is a senior reporter for and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.