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Active or passive, ETFs aim to help your portfolio perform better

There's a time and a place for actively managed exchange-traded funds, says Mackenzie Investments' Michael Cooke

Date: February 08, 2017

Canadian investors can’t seem to get enough of exchange-traded funds (ETFs). Between 1999 and 2016, the country’s ETF pool grew from just three funds to more than 500 with total assets of $114-billion, according to the National Bank of Canada.

What’s driving the proliferation of ETFs? With investors expecting the next five to 10 years to deliver more muted stock and bond returns, relatively low costs are a big part of the draw. But cost isn’t the be-all and end-all, warns Michael Cooke, Senior Vice President and Head of Exchange Traded Funds at Mackenzie Investments.

“You want to make sure you’re getting value for the price that you’re paying,” Mr. Cooke says. “And in certain instances, the absolute lowest-cost solution in the marketplace may not be appropriate for a particular investor.”

With that in mind, – actively managed ETFs can be a great fit in many investor portfolios. As Mr. Cooke points out, many investors associate ETFs with traditional indexing or passive exposure. But active products offer the best of both worlds: liquidity, cost-effectiveness and transparency, plus the power to cater to a wider range of investment needs. “It’s not a debate about active versus passive, but just that as investor needs evolve, there are more and more choices available within the ETF industry,” Mr. Cooke says.

Last year Toronto-based Mackenzie introduced its Maximum Diversification ETFs – five smart beta offerings that replicate indexes provided by Paris-based asset manager TOBAM. These rules-based ETFs seek to achieve the most diversified equity portfolio across all the risk factors influencing stock market returns. Mr. Cooke says that because strategic or smart beta index ETFs apply the risk-return inputs that drive active management, they’re a blend of active and passive.

“This is the evolution of portfolio construction and what it means to diversify an equity portfolio,” he explains.

“And it’s now been packaged into something that’s systematic, cost-effective and transparent, governed by a clear set of rules and can help an investor achieve a more specific outcome in their portfolio.”

On the fixed-income side, with even some of the world’s biggest investment firms finding it tougher to navigate bond markets, ETFs offer advisors and investors a way forward. “You’re still preserving many of the benefits of using individual securities, but with the diversification benefits and, in the case of the Mackenzie fixed income ETFs, the value-added of an active strategy to help mitigate some of the risks as well,” Mr. Cooke says.

He believes the time is right for actively managed fixed income ETFs. Since the 2008-’09 financial crisis, Mr. Cooke notes, interest rates have plunged, along with credit quality in some areas. “All of that has introduced unintended risks into fixed-income markets, whether it’s interest rate sensitivity or credit risk,” he says. “At certain points in the market cycle, it makes more sense to have some guidance, some active management.”

Although the Canadian market for active bond ETFs is growing, it’s still fairly small. Mackenzie clients can choose from four such funds: Core Plus Canadian Fixed Income (MKB), Core Plus Global Fixed Income (MGB), Unconstrained Bond (MUB) and Floating Rate Income (MFT).

For investors whose asset mix might leave them overexposed to Canada’s economic and interest rate cycles, the Mackenzie Core Plus Global Fixed Income ETF helps them diversify their bond holdings elsewhere. “There’s aren’t many options for those seeking actively managed global fixed-income ETFs that provide, in a single investment, exposure to the fixed-income markets and interest rate cycles of over 30 different countries,” Mr. Cooke says. “We think there’s virtually no competition in the category of a truly active global fixed-income portfolio that we have in the Mackenzie MGB.”

Looking beyond Mackenzie’s eight-member ETF team, clients enjoy the benefit of the firm’s $61.3-billion infrastructure, which includes compliance, operational, trading and investment management support. When it comes to portfolio management, for example, there’s the Mackenzie fixed-income group, headed by Steve Locke and comprising 17investment professionals, which manages assets on behalf of numerous institutional and retail client groups.

For investors wondering how ETFs might fit into their portfolio, Mr. Cooke suggests working with an advisor to determine the right blend of asset classes to reach their goals. “Then, as a byproduct of that first step, [I’d ask myself], ‘What are the most useful building blocks to help me achieve my objectives?’ ”

The best practices of the world’s largest and most successful investors provide a compelling case for both active and passive management, Mr.Cooke emphasizes. “Increasingly, we’re seeing institutional and retail investors saying, ‘I see the need for both in my portfolio, and I can build a better outcome for myself if I consider the different building blocks that are at my disposal.’ ”

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