Canadian ETF investors get active

April 1, 2021 | Last updated on April 1, 2021
3 min read
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While passive funds account for the majority of ETF assets in Canada, active ETFs have been capturing an increasing share over the last few years.

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“Active ETFs are now approximately 25% of Canadian ETF market [assets],” said David Stephenson, director of ETF strategy and development at CIBC Asset Management, in a recent interview.

Active funds account for almost half of total Canadian-listed ETFs, he said, which number more than 1,000.

Of 172 ETFs introduced to the Canadian ETF marketplace last year, two-thirds used active strategies, according to a National Bank Financial report in January. Active ETF launches first outnumbered passive in 2015.

“Canada’s ETF market has always been a global ‘testbed’ for active ETF launch and innovation,” the report said.

The pace of passive launches has been steady over the past decade, it said.

In the U.S., active ETFs represent about 3% of the market ($320 billion in assets under management) and account for 20% of U.S.-listed ETFs, Stephenson said.

Last year active ETF growth in the U.S. was “significant,” he said, and growth is expected to continue, reflecting regulatory changes in December 2019 that allow for a non-transparent fund structure that doesn’t disclose daily holdings.

“Many large U.S. mutual fund managers are now bringing ETFs into the market,” Stephenson said. “This growth will also raise visibility more, benefiting Canada as well.”

In particular, he expects to see active ETF growth in Canada in fixed income, and in global and international equity. (Global funds have a mix of domestic and foreign investments, while international funds comprise solely foreign investments.)

For example, investors can find attractive valuations in Europe relative to those in the U.S., whether based on price to earnings, price to book, or price to cash flow, he said.

“An active manager can essentially look into some of these [international] markets and capitalize on opportunities where they see best value,” he said.

Despite the growth in active funds, index ETFs still dominate, accounting for 67% of ETF assets under management in Canada, according to National Bank Financial. (In addition to active and passive, 9% of ETF assets are in strategic funds.) Of the record $24 billion that went into equity ETFs last year, $15 billion went to passive cap-weighted funds.

And, as during past sell-offs, asset flows last year “diverted toward passive index products, while active ETFs drew less attention from twitchy-fingered investors,” the report said.

Stephenson said the benefits of index ETFs are “well-known and tested”: broad diversification, low costs and attractive returns of the market or asset class over time.

“Investors can essentially capture the return of an entire market or asset class with one trade and pay exceptionally low management fees,” he said.

Still, he sees active and passive management as being complementary.

“Investors can add incremental returns by using a combination of actively and passively managed ETFs,” he said. “At the end of the day, there is enough product choice for investors to use ETFs to best benefit their portfolios and meet investor objectives and goals.”

A survey of institutional investors, financial advisors and fund managers in the U.S., Europe and China found growing interest in active ETFs, among other categories. Almost two-thirds of respondents said they planned to increase their exposures to active ETFs, up from 57% last year.

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