ETF manufacturers are favouring active funds, with 93 of the 122 new products launched this year in Canada being actively managed.Ilija Erceg/iStockPhoto / Getty Images
Exchange-traded funds began as passive investments, allowing investors to buy one product that included all the securities in a particular stock index such as the S&P 500. While those investments are still going strong, more and more asset managers are turning to active strategies to expand their portfolio of products and entice new investors.
In the first six months of 2024, 122 new ETFs were listed in Canada – on track to beat the yearly listing record set in 2021, according to data from National Bank of Canada Financial Markets.
Overwhelmingly, ETF manufacturers favour active funds, with 93 of the 122 new listings this year being actively managed, the data show.
There are three key reasons why managers are launching active ETFs, says Linda Ma, vice-president of ETFs and financial products research with National Bank of Canada Financial Markets: market competition, investor demand and the regulatory environment.
More than 40 ETF providers in Canada manage more than 1,400 funds. The biggest players dominate in issuing passive ETFs, so the “active approach is a natural choice” for smaller providers looking to stand out, Ms. Ma says, as the variety of active products is unlimited – from small-cap stocks to global fixed income to covered calls.
Investors are also willing to pay a bit more for an active ETF. The average ETF in Canada charges a management expense ratio of 0.33 per cent, while active funds charge 0.57 per cent on average. “People are willing to pay, and for providers it’s a nice revenue increase,” Ms. Ma adds.
Dan Hallett, principal and vice-president of research at HighView Financial Group, says one of the easiest ways for fund companies to grow assets under management is to keep launching new products.
“But there’s only so much appetite for another S&P 500 or S&P/TSX Composite Index fund,” he says. “Unless you’re going to launch it for free.”
Differentiating from existing products usually means launching an active fund, he adds.
Canada’s regulatory environment, which makes it easy for providers to launch new ETFs, may also be contributing to the growing number of active products, Ms. Ma says.
Actively managed ETFs account for 31 per cent of the total Canadian ETF market by AUM, she says, up from 16 per cent about eight years ago. And 51 per cent of ETFs listed are actively managed, which she describes as any ETF that does not track an index.
ETFs have outsold mutual funds every year since 2018, except for 2021. Regulatory changes requiring advisors and managers to improve transparency so investors can see the fees charged by mutual funds have contributed, Ms. Ma says. On average, in 2022, depending on the class of mutual fund, fees ranged from 0.95 per cent to 1.7 per cent.
Still, mutual funds are huge in Canada. As of June, ETF AUM totalled $442-billion, or 17 per cent of mutual fund assets in the country.
Many asset managers see the growth of active ETFs and “want to capitalize on that trend,” says Ian Tam, director of investment research at Morningstar Canada. In addition, as assets have flowed out of mutual funds, providers are “rewrapping” some of their mutual funds as ETFs, basically offering the same strategy.
Dynamic Funds, owned by Bank of Nova Scotia, launched three new actively managed ETFs in July with a focus on gold, real estate and mining opportunities.
Alan Green, vice-president of ETFs for Dynamic Funds, says the firm’s active management business has evolved from broad categories such as key fixed income exposures and discount core exposures.
“We’re now refining that and getting into more focused areas … in which active management thrives, and [there are] teams at Dynamic Funds that have long-term records of delivering alpha in each of those sectors,” he says.
The company launched its active ETF business in response to changes in the broader wealth management business, he says, in which advisors preferred the flexibility of the “ETF wrapper” to build diversified portfolios. ETFs come at a lower cost and allow advisors to make intraday trades while mutual funds trade only once a day.
Mutual funds make more sense than an ETF in some situations, Mr. Tam says, and that’s when the underlying strategy is in a niche and therefore is less liquid, such as a small cap or emerging markets fund.
An August report from TD Securities found that many investors turn to mutual funds for active strategies “given their longer track records and wider depth of strategies.”
“More active ETFs are needed to capture investors currently investing in active mutual funds,” the report says.
It also noted that many large asset managers have expanded their active ETF lineups and focused on new products in this area.
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