Innovate or die is a familiar expression in the corporate world – Blockbuster and Polaroid are two iconic examples of companies that failed to innovate, withered and eventually had to file for bankruptcy. Product offerings must evolve to meet evolving customer needs and the financial industry is no exception.
Enter exchange-traded funds – also known as ETFs. Since their launch in 1993, ETFs have transformed the investment landscape and continue to capture more of the market year-over-year. According to a 2016 Credit Suisse report, 14 out of 15 of the most actively traded securities were ETFs. In Canada, more than $26-billion flowed into ETFs in 2017, a 56 per cent increase from the previous year.
Danger with following the herd
While ETFs originated as passive investments that simply track an index, they have evolved over time. Actively-managed ETFs are on the rise in Canada, with Canadian investors accounting for 22 per cent of the world’s total. Active managers, who once managed predominantly mutual and hedge funds, more and more are viewing ETFs as a way to create lower-cost, highly diversified, strategic funds.
Active ETFs offer many of the same benefits as their passive counterparts, such as lower fees and liquidity, but they also incorporate some form of active management, such as ‘smart beta’ strategies that screen for different factors (dividend growth, historical volatility and total earnings, are a few examples).
More than two-thirds of the newly launched ETFs in the first three quarters of 2017 were actively managed, according to a 2017 report from analysis firm Investor Economics. But how actively-managed were they?
Give investors what they want
Dynamic Funds believed there was a way to create a 3G ETF solution, to borrow a cell phone analogy. “What we saw was an opportunity to use professional money managers to manage legitimately active ETFs,” says Mr. Mark Brisley, Managing Director and Head of Dynamic Funds. “Using their knowledge and skill and through fundamental research, these managers can create their own baskets of securities with an aim to achieve returns that will outperform the index. It’s an innovative step in active management and an evolution of the ETF.”
It’s an evolution that makes sense to Mr. Brisley. “These investors want funds that focus on companies chosen for their merit,” he explains. “They want investment strategies that uncover opportunities and go beyond the benchmark.”
He adds, “active professional money managers can add higher performance potential by owning a thoroughly researched, highly selective basket of stocks rather than the entire market.”
Mr. Brisley and his company teamed up with BlackRock Asset Management Canada Limited to launch Dynamic iShares Active ETFs.
“Our clients have responded extremely well to these funds,” he says. “We chose segments of the market where the ETF structure made the most sense — areas where active management made sense. For instance, Dynamic offers an actively managed ETF that provides advisors with a simpler, more effective way for their client base to get access to the market of preferred shares. “Dynamic launched a product using a structure that the industry was already moving towards and supports the increase in advisors who have moved towards a fee-based structure.” He adds that these funds, which were first released in 2017, are Dynamic’s fastest growing product segment.
Managing Director, Head of iShares Canadian Product at BlackRock, Pat Chiefalo, says his team also saw the writing on the wall when it came to the wants of the investor and the needs of the market. “We believe our clients are looking to access active strategies in an ETF wrapper,” says Mr. Chiefalo. “It’s a growing part of the market and we felt that combining Dynamic’s strong active portfolio management capabilities with BlackRock’s proven ETF expertise was an innovative and robust way to address this need.”
Commissions, management fees and expenses all may be associated with mutual fund investments and Dynamic iShares Active ETFs. Please read the prospectus before investing. Mutual fund investments and ETFs are not guaranteed, their values change frequently and past performance may not be repeated. Dynamic iShares Active ETFs are managed by BlackRock Asset Management Canada Limited and invest in selected mutual funds managed by 1832 Asset Management L.P. Views expressed regarding a particular company, security, industry or market sector are the views of the writer and should not be considered an indication of trading intent of any investment funds managed by 1832 Asset Management L.P. These views should not be considered investment advice nor should they be considered a recommendation to buy or sell. Dynamic Funds® is a registered trademark of its owner, used under license and a division of 1832 Asset Management L.P. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc, or its subsidiaries in the United States and elsewhere. Used with permission. ™Trademark of its owner, used under license.
This content was produced by The Globe and Mail’s Globe Content Studio, in consultation with an advertiser. The Globe’s editorial department was not involved in its creation.