ETF Providers Pivot to Strategic Beta, Active Management

With asset growth stalled by volatile markets, managers are shifting toward more expensive strategies, according to Cerulli.

Illustration by II

Illustration by II

Exchange-traded fund providers are increasingly turning to strategic beta and actively managed strategies for revenue after rapid industry growth stalled last year amid market tumult.

While passive ETFs have captured a “significant majority” of capital flowing into the $3.4 trillion industry, strategic beta and active strategies are catching up, consulting firm Cerulli Associates said in a report Thursday. A Cerulli poll shows that strategic beta ETFs — which use rules-based strategies that are not necessarily market-weighted — are the most popular strategy under development.

ETF assets grew at a compound annual rate of 21 percent during the five years through 2017 as investors flocked to low-cost, passive strategies, according to the report. The growth stagnated last year as equity markets declined, leaving ETF providers to consider developing more expensive strategic beta and active funds.

“Passive ETF fees are just incredibly low,” Daniil Shapiro, an associate director with Cerulli, said by phone. “You can charge a little bit more on a strategic beta product.”

Strategic beta strategies target exposure to stock characteristics such as growth or value, using a customized approach that aims to produce alpha, according to Shapiro. It’s not a strictly passive approach because the rules for the strategy are created by a manager, he said.


Forty-one percent of firms polled by Cerulli said they were currently developing actively managed ETFs, making them the second most popular type of fund under development after strategic beta. When it came to future development plans, though, active ETFs were the top choice.

Thirty-seven percent of managers are planning to develop active ETFs, compared to 11 percent citing development plans for strategic beta products.

Fixed-income managers seem willing to make their active strategies available in a transparent structure, Cerulli said, while equity managers are waiting for regulators to approve ETF structures that are not transparent.

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As interest in truly actively managed ETFs increases, the industry will be challenging its traditional roots in strategies that are cheap, passive and transparent. ETFs have flourished by challenging the need for expensive active management, according to Shapiro, who said that money continued to flow into the industry last year despite market volatility.

“Issuers will need to strategically assess the viability of ETF variations and whether or not they support the spirit of the ETF industry and provide value to investors,” he said in the report.