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Advisor ETF Insights

Investing in ETFs: 3 trends to watch

Exchange-traded funds are increasingly seen by investors as a lower-cost and more transparent way to invest. Here are three trends that continue to shape the sector

By: BRENDA BOUW

Date: April 24, 2017

Exchange-traded funds used to be considered an alternative product for the less sophisticated investor. Not anymore.

A growing number of investors, both active and passive, are turning to ETFs as a lower-cost and more transparent way to invest their money.

The value of Canadian ETFs reached $120-billion at the end of February, up 36 per cent from the same period a year earlier, according to data from the Canadian ETF Association.

An expanding menu of ETF options in categories such as region, industry, product and market performance is also driving growth in the sector.

"Investors are starting to understand that they can replace their high-cost investments with lower-cost investments, especially in more ‘plain vanilla’ strategies where it can be difficult for active management to effectively and consistently add value," says Krista Matheson, head of ETFs and structured products for Manulife Investments.

A handful of trends are emerging from the increased choice and heightened interest in ETFs. Here are three to watch:

1. Strategic beta

It sounds like a high-risk card game, but strategic beta (sometimes known as "smart beta") is basically passive investing with more rules.

"It's very structured and defined," says Ms. Matheson.

Unlike traditional market-cap weighted index funds, strategic beta equity funds include stocks that are selected and weighted by characteristics such as high dividends or low volatility.

“Strategic beta products represent a middle ground on the active-to-passive spectrum – they deviate from a traditional, strictly passive market portfolio, but do so in a rules-based, transparent, and relatively low-cost manner,” according to Morningstar’s strategic beta guide. “The majority of these indexes aim to enhance returns or minimize risk relative to a traditional market-capitalization-weighted benchmark.”

Ms. Matheson says strategic beta funds are also considered more transparent than active strategies, because they are rules-based and investors can track daily what's in the ETF and easily compare how it's performing. "I also think that's driving a lot of interest in strategic beta ETFs," she says.

2. Socially responsible ETFs

Millennials are considered a socially-conscious generation. As consumers, they seek out brands that help protect the planet and give back to communities, and their investing habits are similar.

"Millennials love socially responsible investments," says Saurin Patel, assistant professor of finance at the Ivey Business School at the University of Western Ontario, who has many students from this generation who are investors.

According to an Ipsos Reid survey conducted for the Responsible Investment Association and commissioned by OceanRock Investments Inc., millennial investors are more than twice as likely as baby boomers to be interested in investments dedicated to solving social or environmental problems.

Mr. Patel says that millennials, like many investors, are also looking for lower-fee investment options, which is what's driving the creation of more socially responsible ETFs. There are a growing number of choices, from broad-sector ETFs such as the iShares Jantzi Social Index in Canada, or more global funds focused on specific areas such as clean energy or water.

"ETFs give [millennials] a good way of investing to compliment their beliefs at a much lower cost," says Mr. Patel.

3. Fixed-income ETFs

Fixed-income is among the fastest-growing categories of ETFs in Canada. According to data from Investor Economics, fixed-income ETFs grew 22 per cent in the year up to December 2016, compared to 29.5 per cent for equity ETFs.

"It's an asset class that investors can't access on their own and a big portion of an investor's portfolio, so you do need a fund for that, whether it's a mutual fund or an ETF," says Ms. Matheson.

She says ETFs are typically lower cost, particularly because many of them are index-based strategies.

"As a result, a lot of investors are looking to ETFs for the fixed-income portion of their portfolio," says Ms. Matheson. Companies are coming out with more fixed-income products to cater to this growing need.

Investors should always be wary of investing trends, but both Ms. Matheson and Mr. Patel expect ETFs to remain a strong part of the market for the foreseeable future.

"If you can provide the same quality for a lower cost, people will definitely move towards that," says Mr. Patel. "It seems like ETFs are here to stay."

Sponsored by Manulife

Commentary is for general information purposes only and should not be relied on for specific financial or other advice. Opinions expressed are subject to change based on market and other conditions. Commissions, management fees and expenses all may be associated with exchange traded funds (ETFs). Investment objectives, risks, fees, expenses and other important information are contained in the prospectus, please read it before investing. ETFs are not guaranteed, their values change frequently and past performance may not be repeated.

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