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Canada is a pioneer in actively managed ETFs

Country has the highest percentage of active funds among the G7 economies


Date: October 29, 2015

By nature, exchange-traded funds are passive investments, made to mirror an index. So does it make sense to buy an ETF that is actively managed, with an expert portfolio manager buying and selling the way mutual fund managers do? Many Canadian investors seem to believe so.

Canada has the highest percentage of actively managed ETFs among the G7 countries, according to data compiled by Bloomberg – nearly 11 per cent of Canada’s $85-billion ETF industry. The top five active ETFs in Canada have assets under management of more than $200-million each.

Yves Rebetez, managing director and editor of ETF Insight, which follows Canada’s ETF industry, lists the five as:

  • Horizons Active Corporate Bond ETF (HAB)
  • Horizons Active Preferred Share ETF (HPR)
  • iShares Canadian Financial Monthly Income ETF (FIE)
  • PowerShares Tactical Bond ETF (PTB)
  • Horizons Active Global Dividend ETF (HAZ)

The popularity of active ETFs keeps growing. More than half of Horizons’ assets under management are now actively traded funds.

By comparison, in Britain, active ETFs make up slightly more than 2 per cent of the ETF market. In the United States it is just 1 per cent (of an admittedly huge $1.2-trillion market).

Experts are not completely sold on the merits of active management. They see the benefits in some situations, but not in others.

“Usually there’s a compelling investment thesis for this,” says John De Goey, vice-president and portfolio manager at Burgeonvest Bick Securities Ltd. in Toronto. “But sometimes it’s because of marketing, which can be a double-edged sword.

“And sometimes it’s because of novelty – people just want to try something different,” he adds.

The question investors need to ask themselves, he says, is: “Can the active managers add enough value to cover their higher costs?”

Mr. Rebetez agrees that marketing can play a big role. “Funds are sold, not bought,” he says, meaning that unlike well-known blue chip stocks, most ETFs are not familiar to ordinary retail investors.

“So in essence, what is going to draw someone to an actively managed ETF is the investment premise of the manager, their methodologies, expertise and so on,” he says.

One reason that managed ETFs are more popular in Canada than elsewhere may be that mutual fund fees in Canada are relatively high. Actively managed ETFs offer the benefits of a manager at a lower price.

Mr. De Goey says that once the decision to go with a managed fund is made, the question becomes whether an ETF or a mutual fund is the choice. “The real driver for deciding is cost, not structure,” he says.

Does active management work for ETFs better than the traditional passive indexes? “One of the key underpinnings of ETFs at the onset is that passive low cost wins,” Mr. Rebetez says. “In essence, asking if active makes a difference is somewhat counterintuitive. ETFs aren’t supposed to be active.”

Nevertheless, under some circumstances active management can bring advantages, Mr. Rebetez says. It can “make broader diversification increasingly accessible to investors without the high costs most often associated with mutual funds.”

In the case of the first two funds among the top five, Mr. Rebetez says, “Horizons is deploying the expertise of Fiera Capital in the area of corporate bonds and preferred shares, arguing that being active in these areas is preferable to the passive alternatives and can add value. The numbers back that up.”

The advantage for the Horizons Active Corporate Bond ETF is that “in fixed income, retail investors never get a good deal on bonds. With [active] ETFs, you get institutional pricing, and the greater clarity as far as pricing that comes from trading on the exchange,” he says.

The third and fourth on the list, the iShares Canadian Financial Monthly Income (FIE) and PowerShares Tactical Bond (PTB), “are somewhat different,” Mr. Rebetez says.

“Both make use of other ETFs to build their exposure, though FIE also has individual stock positions,” gearing it toward people seeking month-to-month portfolio gains.

The tactical bond ETF (PTB) “is all about the fact that for a couple of years now, everyone has been worried about what happens with fixed income once [interest] rates begin to rise. PTB is PowerShares’ solution to that problem.”

The last of the most popular five, Horizons Active Global Dividend (HAZ), “is an actively managed, quantitatively driven product strategy for which Horizons has retained Guardian Capital as the asset manager,” Mr. Rebetez says. “It focuses on dividends, and its appeal resides in the manager’s ability to blend [securities that are] dividend payers, achievers and aristocrats. This is a strategy focused on the manager’s expertise in managing for yield, but also for risk.”

Mr. De Goey says many investors look to managed ETFs for comfort, but “comfort and intelligence are not necessarily synonymous.”

Mr. Rebetez says that “it may indeed make sense to make use of an active manager for specific purposes,” but not always.

“Investors are smart if they understand what they are buying and what they are getting for their money. They are even smarter if it does end up working. They are not smart if, in the end, they overpay and reach subpar results.”

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