Investing September 7, 2017

Strategic Beta ETFs Deserve a Second, Careful Look

Strategic beta ETFs are an important asset class to consider, but new research also warns many of the products “aren't as distinctive as they may first appear.”

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New research from Morningstar, dubbed “A Global Guide to Strategic-Beta Exchange-Traded Products,” offers a helpful overview—and a word of caution—about the strategic beta exchange-traded fund (ETF) landscape.

Ben Johnson, Morningstar’s director of global ETF and passive strategies research, says one clear finding is that in the years to come, an increasingly crowded and competitive landscape will put pressure on fees.

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“It remains to be seen whether incumbents’ fees will face pressure from competitors, investors, or both,” he explains.

Findings from the analysis show, as of June 30, 2017, there were 1,320 strategic-beta exchange-traded products, with collective assets under management of approximately $707 billion worldwide. Assets in these products grew an impressive 28.4% relative to their June 30, 2016 level, Morningstar reports.

As the research shows, the number of assets and funds in this space has grown much more rapidly than the broader ETF market as well as the broad asset management industry.  Johnson notes there were 204 new strategic-beta ETFs brought to market in the 12 months through June 2017, down slightly from 211 during the prior period.

“Morningstar has assigned Morningstar Analyst Ratings to 119 strategic-beta ETPs worldwide since November 2016,” Johnson adds. “These funds collectively held more than $495 billion in investors’ money as of June 30, 2017—representing 70% of the total amount invested in strategic-beta ETPs around the globe.”

Fueling the rapid expansion, Morningstar’s research finds, is in part the fact that the fees levied by strategic-beta ETFs are, on average, “competitive with those charged by the universe of ETFs ex-strategic beta.”

Crucial for investors to consider, the research is also frank about the limits of the emerging asset class. Morningstar’s separate Strategic Beta Performance Replication Study challenges some strategic-beta funds’ pricing by attempting to determine whether it is possible to replicate strategic-beta equity funds’ performance with various combinations of market-cap-weighted alternatives.

“Strategic-beta funds aren’t as distinctive as they may first appear. It’s possible to replicate most of their performance with size and value exposures that simple cap-weighted indexes can offer, suggesting that most of these funds just repackage market risk,” explains Alex Bryan, director of passive strategies research, North America. “Investors shouldn’t pay significantly higher fees for these strategies than market-cap-weighted alternatives, which capture the same performance drivers and can replicate most of their returns.”

The Morningstar researchers conclude that many strategic-beta funds are still worth investing in, even if their merits are sometimes exaggerated, as a large minority of strategic-beta funds did outperform their replicating portfolios. Additionally, the researchers feel it is “more efficient to purchase a strategic-beta fund than trying to reassemble its factor exposures, which often shift over time.”

More information and analysis is available from Morningstar here. 

Break from the Grind September 7, 2017

A Little Friday File Fun

And now it's time for FRIDAY FILES!
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Somewhere in California, a UPS driver left a package for the renter of a fifth-floor apartment. He propped the tall, rectangular package up under the renter’s doorknob. When the renter tried to get out, he was trapped. He had to call maintenance to get out. On a tweet, the man noted that it was not only an inconvenience, but a hazard in case of an emergency, since he was five floors up.

 

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In Corona, California, a woman was eating an organic salad when she noticed a tiny frog. She screamed, jumped up, and went to the bathroom to upchuck. Meanwhile, her husband discovered the frog was still alive. After rinsing the dressing off the frog, the husband rubbed its belly and roused it from its stiff state. They felt weird about dumping the frog somewhere, so they put it in an old aquarium in their home and named it “Lucky.”

 

In Bristol, England, a man and woman went on a date and afterwards to the man’s apartment to watch a show. The woman went to use the bathroom and came back with a panicked look. According to the Huffington Post, the woman admitted she had taken a poo and the toilet wouldn’t flush, so she reached into the toilet, grabbed the poo, wrapped it in tissue paper and threw it out the window. But, it gets worse. The man suggested going outside to properly dispose of the poo. However, the man’s bathroom window opens into an 18-inch gap that is separated from the outside world by another non-opening double glazed window. He reached for a hammer to smash the window, but the woman climbed into it head first to retrieve the poo. She did that successfully, but then discovered she was trapped. Firefighters were called, and they freed the woman in 15 minutes. The man told the Daily Star he was still open to seeing her again.

 

In Rotorua, New Zealand, a man reported his car stolen. A man who purchased the car from a website came forward concerned that he had bought a stolen car. Upon further investigation, it was discovered that the man who reported the car stolen had sold it the day before to purchase more al.cohol, but could not remember it.
Did this weatherman really do what it looks like he did on live TV?

If you can't view the below video, try https://youtu.be/7P-u9JqV0XQ.

In New York City, a man crossing the street had his leg swallowed by a sinkhole after the road abruptly gave way beneath him. The man sat in the crosswalk in Brooklyn until firefighters arrived to free him.

If you cannot view the below video, try https://youtu.be/Ac9d3D2n3tk.

In Melbourne, Australia, a cyclist noticed a Google Street View car and decided to take his few seconds of fame. He followed the car doing a dance moved called “dabbing.”

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