The “ETF Managed Portfolios Landscape Report,” for which Morningstar analysts evaluated the growth, assets, performance, categories and other trends among the ETF managed portfolio strategies included in Morningstar’s database also found:
- The total amount of ETF managed portfolio strategy assets in the U.S. is estimated to be between $40 billion and $100 billion when factoring in discretionary and non-discretionary assets and model portfolios;
- The space is dominated by global strategies (defined as strategies where investors can gain exposure in any global market), which hold more than 72% of all ETF managed portfolio assets);
- The subset of Global All-Asset strategies, which have the ability to invest in multiple asset classes, captured more than half of the asset growth in ETF managed portfolios over the past year; and
- An important factor driving growth is the trend for financial advisers to outsource money management functions to firms specializing in ETF managed portfolio strategies, which allows advisers to focus on managing clients’ overall financial profiles.
In a separate report titled “ETFs Under the Microscope: Tax Efficiency Survey,” Morningstar examined the tax efficiency of ETFs by measuring the frequency of capital gains distributions of ETFs compared with indexed open-end mutual funds over the past five, 10, and 15-year periods. The report found that most ETFs are tax-efficient compared with open-end funds, and the primary driver of ETFs’ tax efficiency is that most ETFs are passively managed index funds.
ETFs also generate a smaller, but still significant tax savings from their structure—in the event of redemptions, ETFs help minimize taxable capital gains through the ability to exchange securities in-kind.
The report also found that tax efficiency is only one small component of after-tax performance: Expense ratios, tracking error, index methodology, and replication methods may have an effect on returns that exceed any tax benefit. In addition, investor behavior, including managing allocations and minimizing turnover, are more important than the tax structure of an investment vehicle when determining long-term performance.
“We wanted to test the tax efficiency claims that ETF providers have boasted about for years, and it turns out their claims are largely true,” said Paul Justice, Morningstar’s director of ETF research, North America. “However, most passive mutual funds are extremely tax efficient as well, and when all efficiency factors outside of the tax question are put into play, we find that fund structure plays only a small role.”
ETF managed portfolios are investment strategies that typically have more than half of their portfolio assets invested in exchange-traded funds. They are primarily available as separate accounts, and they represent one of the fastest-growing segments of the investment industry.
In September 2011, Morningstar announced plans to research and rank ETF managed portfolios. Morningstar developed a proprietary portfolio attribute classification system based on its analysis of the ETF managed portfolio's investment strategy, as well as a historical review of disclosed holdings.
Morningstar's new system evaluates four main attributes: Universe (which looks at the starting scope of a strategy's investment process on a global basis), Asset Breadth, Portfolio Implementation, and Primary ETF Exposure Type. The information is now available in Morningstar Direct(SM), the company's web-based global investment analysis platform for institutional investors.
Additionally, as a result of the changing distribution dynamics in the industry shown in the report, Morningstar plans to begin systematically collecting assets under advisement (AUA) for separate account strategies in 2012 to better capture assets following a given strategy.
The full "ETF Managed Portfolios Landscape Report" can be found at http://global.morningstar.com/ETFLandscape2012. The full "ETFs Under the Microscope: Tax Efficiency Survey" report can be found at http://global.morningstar.com/ETFTaxEfficiency2012.