Investing in exchange-traded funds (ETFs) once meant a passive index-tracking strategy, but now there is a new generation of kids on the block.
Actively managed ETFs resemble traditional mutual funds but charge lower fees that can help to improve performance. Some of these ETFs are overseen by portfolio managers picking stocks and bonds. Other managers use computer-driven, quantitative strategies to screen for securities. Active ETFs have the potential to post market-beating returns, but there are no guarantees.
We asked three analysts for their top picks among Canadian or U.S.-listed active ETFs. Their recommendations ranged from funds investing in everything from so-called "responsible" stock investments to preferred shares and senior loans.
Daniel Straus, ETF analyst at National Bank Financial Inc., Toronto
The pick: PIMCO Monthly Income ETF (PMIF-TSX)
Management expense ratio (MER): 0.87 per cent
Income-seeking investors may want to consider this bond ETF despite a challenging rising-interest-rate environment, says Mr. Straus. This ETF, which listed last fall, is run by U.S.-based Pacific Investment Management Co. (Pimco), which has a strong record in active bond management, he said.
It is a version of a mutual fund launched in 2011. It invests in non-Canadian dollar, fixed-income securities with various maturities, and has a monthly distribution.
"The managers have proven themselves able to offer a stable income, while preserving capital through multiple-market cycles," he said. The ETF's fee is higher than bond-index ETFs, but the managers earn their keep because they also deal with complex securities, such as non-agency, mortgage-backed securities, he noted. A 2008-style financial crisis or sudden rate hike could hurt the portfolio, he said.
The pick: AGFiQ Enhanced Global ESG Factors ETF (QEF-Neo Exchange)
MER: Not available. Management fee is 0.45 per cent
Investors seeking securities that align with their personal values may want to examine this global equity ETF, which holds companies based on their environmental, social and governance (ESG) records, says Mr. Straus.
"This is still a nascent area in the world of ETF investing, but it's growing in importance, especially among younger investors."
A team at Toronto-based AGF Investments Inc. uses a quantitative strategy to screen for firms deemed to be responsible investments as opposed to focusing only on financial performance.
Launched in February, the ETF is more than 40 per cent invested in information technology and financial stocks. It owns Alphabet Inc., Siemens AG and others. The ETF's management fee is reasonable for a globally diversified portfolio, he said. A global economic downturn or geopolitical uncertainty are risks for this ETF.
Denise Davids, ETF and mutual fund analyst, Industrial Alliance Securities Inc., Toronto
The pick: BMO International Dividend ETF (ZDI-TSX)
MER: 0.44 per cent
This ETF, which invests in non-North American dividend stocks, is suitable for investors who can tolerate "a moderate amount of risk," says Ms. Davids. BMO Global Asset Management uses a quantitative approach to screen for stocks that are easily tradeable, have stable or increasing dividends over the past three years, and can provide sustainable dividend income, she said.
Financials, which represent about 25 per cent of the fund, provide the largest sector weighting. Britain, Australia and France are the biggest country positions.
The ETF's fee is attractive because it is among the lowest in its category, she noted. Risks include uncertainty surrounding Britain's withdrawal from the European Union, and normalization of monetary policy by the European Central Bank which would lead to rising interest rates, she said. "That can hurt dividend stocks."
MER: 0.65 per cent
An actively managed ETF is a better option than a passive-index fund when it comes to investing in the more complex, preferred-share space, says Ms. Davids.
"There are various types of preferred shares, and each will perform differently depending on things like the direction of interest rates, the number of new issuances and the credit profile of the issuers."
The Horizons ETF is managed by Montreal-based Fiera Capital Corp., which has an expertise in these dividend-paying securities, she said. The ETF, which provides a monthly distribution, holds preferred shares of Canadian banks and companies, such as Enbridge Inc. and TransCanada Corp.
This ETF has returned 2.6 per cent annually over the five years ending March 31 versus 0.96 per cent for the S&P/TSX Preferred Share Index, she noted. The 0.65-per-cent fee charged is reasonable for an active ETF, she added.
Alex Bryan, ETF and mutual fund analyst at Morningstar Inc., Chicago
The pick: PIMCO Active Bond ETF (BOND-NYSE)
MER: 0.61 per cent
Yield-hungry investors may want to consider this active bond ETF because its mandate now focuses on providing monthly income, says Mr. Bryan. This ETF, which is overseen by U.S.-based Pacific Investment Management Co. (Pimco), was once run by renowned bond manager Bill Gross, who left the firm in 2014. The ETF changed its name and former total-return strategy when a new management team took over.
High yield bonds, which were once capped at 10 per cent, have risen to about 30 per cent of the ETF, Mr. Bryan said. This US$2.1-billion ETF, which charges a competitive fee versus its mutual fund peers, had a distribution yield of 3.8 per cent over the past year, he noted.
While rising interest rates are a risk to bonds, investors should still have exposure to these assets to help cushion an investment portfolio in case of a stock-market selloff, he said.
The pick: SPDR Blackstone/GSO Senior Loan ETF (SRLN-NYSE)
MER: 0.70 per cent
Investors concerned about rising interest rates may find this ETF appealing because it holds floating-rate senior loans, says Mr. Bryan. "If rates go up, investors immediately earn a higher yield on the fund."
Senior bank loans are private debt issued by financial institutions, such as banks or a syndicate of lenders, to non-investment-grade companies. Given the fact that these loans have a lot of credit risk and are not easily tradeable, an "active management approach makes more sense than an index version," he said.
In the event of a bankruptcy, however, senior bank loans must be repaid before other creditors, such as preferred and common shareholders. The ETF's fee for active management is not that much more expensive than the 0.55 per cent for the cheapest senior loan index fund, he added. The ETF also pays a monthly distribution.