Nearly one-in-five Canadian exchange-traded funds don’t survive four years, according to National Bank Financial data, so beating the odds is no small feat.
Lack of investor interest, limited assets and poor performance are some of the main reasons why ETFs don’t survive. Examples in 2020 include the closure of the Evolve North American Gender Diversity Index Fund in March due to investor apathy and two of its cannabis funds after a rocky period in the sector. Another example is BMO Asset Management Inc.’s termination of two energy ETFs and one value index ETF at the end of last year amid ongoing volatility in the oil and gas sector.
According to data from National Bank Financial, 223 of the 1,239 exchange-traded funds that have launched in Canada, or about 18 per cent, have ended up delisting. The average lifespan of a delisted ETF is about three and a half years, the data shows, meaning funds that have already been around for a year or two will either start to come of age in 2021, or will quietly begin to crumble.
“The important thing for investors to know is that when this happens, it’s more of an annoyance (with possible tax consequences from the forced disposition) rather than a true risk to their holdings,” says Daniel Straus, director of ETF research and strategy for National Bank Financial.
Still, ETF providers don’t launch a fund only to see it go away after just a few years, betting that their products reflect enduring market trends. Some newer ETFs expected to beat the odds, thanks to rising interest and market trends, are in sectors such as innovation and technology, as well as uranium and bonds.
Emerge Canada Inc. CEO Lisa Lake Langley is confident her company’s set of five innovation-focused funds launched in mid-2019 will continue to attract investor interest.
When her firm started investing in innovation in 2016 advisors viewed it as “the riskiest thing on planet Earth and would only identify clients whom they thought were already one step away from going to the casino with their money,” she says.
“Now, it has become much more accepted and the pandemic has accelerated that acceptance,” she adds, referring to the increased attention investors have paid to new technologies – particularly those related to working from home and to medical research as a result of the pandemic.
In the 18 months since its debut, the Emerge ARK Global Disruptive Innovation ETF (EARK-NE) has returned about 160 per cent. The actively managed fund, which counts the likes of Tesla Inc. and Square Inc. among its top holdings, “takes the strongest holdings from genomics and biotech, fintech, e-commerce and global payments and AI [artificial intelligence],” Ms. Langley says.
With roughly $135-million in assets under management (AUM), EARK is by far the largest of Emerge’s five funds. The series also includes a Genomics and Biotech ETF (EAGB.NE), an AI and Big Data ETF (EAAI-NE), an Autonomous Tech & Robotics ETF (EAUT-NE) and a Fintech Innovation ETF (EAFT-NE). Each has a management expense ratio of about 1.7 per cent and AUMs that have more than doubled in value. Still, with AUMs ranging between $13-million and $40-million, the secondary funds have thus far garnered much less attention than the catchall EARK fund. (All data from Morningstar)
Ms. Langley expects their AUMs to grow this year as investors get more comfortable making longer-term bets in technology and innovation.
“Innovation is just beginning to be understood,” she says. “It has its own velocity that is not correlated to the market. They are solving tremendous problems, not instantly, but over time.”
Mike Philbrick, the president of ReSolve Asset Management, believes 2021 could also be a good year for uranium, a long-declining commodity, as nuclear energy regains acceptance and as supply slips below demand.
The prediction bodes well for the Horizons Global Uranium Index ETF (HURA-T), launched in May 2019 as Canada’s first ETF to provide direct exposure to the global uranium sector. HURA has returned 65 per cent over the past year.
The ETF, with an MER of 0.86 per cent and AUM of $12.5-million, “offers a fully-integrated way to play the space by incorporating the commodity itself as well as small, mid and large-cap miners,” Mr. Philbrick says. “And with almost zero carbon emissions, nuclear power will likely be part of the climate change playbook.”
Increasingly popular “all-in-one” funds, which give investors access to a diversified range of assets in a single purchase, are also expected to gain traction this year, says Pat Dunwoody, executive director of the Canadian ETF Association.
She says the products are easy to understand “and it’s very clear by the portfolio what kind of asset allocation it is,” she says, which makes rebalancing easier.
Boasting as many as 15,000 individual components under one ticker, Vanguard launched the Vanguard Global Aggregate Bond Index ETF CAD-Hedged (VGAB-T) in January 2020 specifically to take advantage of that trend. The new fund, with an MER of 0.33 and AUM of $40-million, is composed of two existing bond ETFs: the Vanguard U.S. Aggregate Bond Index ETF CAD-Hedged (VBU-T) and the Vanguard Global ex-U.S. Aggregate Bond Index ETF CAD-Hedged (VGB-T).
VGAB’s performance is roughly flat since it launched a year ago. Still, Scott Johnston, head of product for Vanguard Americas, says there’s a “significant ongoing trend toward the use of fixed income ETFs” that he believes bodes especially well for VGAB as investors brace for more volatility in the year ahead.
Experts say it can be difficult to know why some ETFs survive, while others die off. Some ETFs also take longer to come of age, such as the iShares Jantzi Social Index ETF (XEN), with an AUM that hovered in the $20-million to $30-million range for the first decade after it launched in 2007.
The fund’s AUM is now about $93-million and patient investors have seen a total annualized return of 10 per cent over the past five years and 6 per cent over 10 years. XEN is also considered one of the best sustainable ETFs in Canada.