Active ETFs finding fertile ground in Canada

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Canada is leading the charge in actively managed exchange-traded funds and will continue to see growth as bigger players are set to launch active funds.

Unlike a traditional ETF that follows a certain index, actively managed ETFs are more like mutual funds, with their own dedicated portfolio management.

Canada has the highest percentage of actively managed ETFs in the G7, with this type of fund representing 13.7 per cent of total ETF assets, compared with just 1 per cent in the U.S. market, as of Dec. 31, according to data compiled by National Bank Financial.

One reason for the lack of actively managed assets in the United States compared with Canada is the difference in how the two countries regulate ETFs.

In Canada, ETFs follow the same portfolio disclosure rules as mutual funds – which include releasing quarterly top 20 holdings and semi-annual full portfolio holdings in its interim and annual financials – information that is publicly available through a fund's website and fund documents, say Steve Hawkins, co-CEO of Horizons ETFs Management (Canada) Inc.

But U.S. ETF providers are required to offer full transparency in how the ETF fund is managed, by publicly disclosing the fund's daily holdings. For an active manager, that could mean disclosing proprietary information, such as sector allocations or stock picks.

"For an ETF – similar to a mutual fund, the day-to-day decisions that a portfolio manager is making to the investment composition of a strategy is less relevant to the investor at the end of the day as … buying or selling that strategy," Mr. Hawkins says. "It is not material information that would affect their buying or selling decision for the ETF or mutual fund."

The Canadian ETF industry ended the year with $89.5-billion in total ETF assets. Canada's growth in the active management space also stems from Canada's financial advisory community, says Barry Gordon, president and CEO of First Asset Capital Corp.

"Many financial advisers think of the world in active terms so they understand that through active portfolio management they can reduce volatility and increase better risk-adjusted returns over all – so it's an investment solution that they will migrate towards," Mr. Gordon says.

In 2015, many investors turned to active-managed fixed-income strategies, including bond ETFs and preferred shares ETFs.

The amount of actively managed assets shifting into the Canadian ETF market will continue to rise in 2016 as several large mutual fund players announced plans to enter the industry with actively managed products.

Both Toronto-Dominion Bank and Mackenzie Financial announced plans to launch proprietary actively managed ETF offerings in 2016. (TD Asset Management will also offer a passive fund family of ETFs.)

Last fall, CI Financial scooped up First Asset – which manages $450-million in 10 actively managed funds.

The increase of active players could be good news for those investors seeking out cheaper alternatives.

"It's inevitable that new players will drive the costs of ETFs down over all," Mr. Gordon says. "It will also help level the playing field between simple ETFs and active strategies – including both rules-based and discretionary portfolio management."

The growth of actively managed funds could start to rise south of the border as U.S. regulators continue to look at the actively managed ETF space.

"In the U.S., there have been several active ETF applications in the works for many years and they are regularly visited," Mr. Hawkins says.

"The U.S. regulators are not very far down the road with respect to active ETFs, but I believe they will eventually get there."