Exchange-traded funds (ETFs) are expected to become a bigger part of Canadian investment advisors’ client portfolios because of their lower fees, liquidity, transparency and a growing selection of products, the results of a new survey suggest.
The survey of 106 advisors conducted by Toronto-based ETFs provider Evolve Funds Group Inc. this fall also shows a preference for active ETFs over passive, although the perception of a limited choice of active Canadian ETFs is hindering that allocation.
Survey participants said they expect to increase their allocation to ETFs to an average of 28 per cent of client portfolios by 2021 from 19 per cent today.
Raj Lala, chief executive officer at Evolve, says he was surprised the expected future uptake of ETFs wasn’t higher among survey participants. “I would have expected the number to be more in line with the industry’s growth rates,” he says.
There were 882 ETFs listed in Canada with about $200-billion in assets under management (AUM) as of Nov. 29, according to data from National Bank Financial Inc.’s (NBF) ETF research and strategy group. That’s up from 774 ETFs with $157-billion in AUM at the end of 2018 and 648 ETFs with $147-billion in AUM a year earlier.
Of the advisors surveyed, 81 per cent said they’re using active ETFs versus 66 per cent for passive ETFs. Almost 40 per cent are using smart beta strategies while 8 per cent said they aren’t using ETFs in their client portfolios.
Mr. Lala expects actively managed ETFs to become even more popular, particularly as more advisors consider migrating away from mutual funds.
“I think a lot of advisors feel that [there are] certain asset classes [for which] they need active management,” Mr. Lala says. He cites fixed-income as an example because of its complexity.
Shaun Hauser, founder and president of Wellington-Altus Private Wealth Inc. in Winnipeg, says many advisors use a combination of active and passive management, but he’s seeing growth in active management as advisors spend more time on client relationships.
“Portfolio managers are morphing into this comprehensive wealth-manager [role],” Mr. Hauser says. “The only way to buy more time is to use vehicles that do the active and the passive portion for you. As an advisor, you become the asset allocator versus the securities selector, and that’s going to allow you to build the trust with the best clients and also still find new ones. That’s where we see our business evolving as we move forward.”
Assets in actively managed ETFs accounted for 24 per cent of Canada’s ETF market as of the end of October versus just 2 per cent in the U.S., according to NBF data.
Canada has a friendlier regulatory environment for “semi-transparent” active ETFs in Canada, says Daniel Straus, vice-president of ETFs and financial products research at NBF.
“These are ETFs with portfolio composition that’s disclosed on a daily basis to participating market makers, but not to the wider market,” he says. “As a result, there has been a flourishing of active ETFs in Canada of various stripes.”
Mr. Straus says those include traditional active ETFs with human managers making portfolio decisions as well as “quant active” ETFs governed by strict rules but don’t necessarily follow a publicized index.
There are also “covered-call” ETFs, which he considers active as the “call option overwriting overlay is often fully actively managed, even if the underlying stock basket is weighted equally.”
When advisors were asked what was preventing them from increasing their allocations to ETFs, almost 28 per cent said the limited number of actively managed ETFs, followed by 21 per cent who said they prefer mutual funds.
Dan Hallett, vice-president and principal at Oakville, Ont.-based HighView Financial Group, which uses different investment vehicles, including ETFs, takes issue with the industry’s standard definition of active ETFs. He believes many ETFs labelled passive are in fact active, including “smart beta” strategies, which are designed by humans to produce risk-adjusted market outperformance.
“I would say about 90 per cent of ETFs represent some sort of active management bet,” Mr. Hallett says.
Although he agrees with the survey’s additional findings that transparency, fees and liquidity/spreads are among the top characteristics advisors look for when selecting ETFs, Mr. Hallett says his selection starts with how the product fits with the portfolio mandate. For example, he says if global equities are desired, all other country, regional and sector ETFs will be ignored.
“The best advisors can do is customize the way they put the portfolio together for clients so it’s in line with their goals, it’s as efficient as it can be tax-wise and it aligns with their risk parameters,” Mr. Hallett says.