How active is an active fixed income ETF?

As ETF assets continue to grow, greater discernment is required by investors to make appropriate fund choices.

In particular, Canadian active fixed income ETFs have recently “exploded” in number, popularity and assets, says a National Bank report that takes a detailed look at these funds, noting that all fixed income funds aren’t the same.

Read: Fixed income drove Canadian ETF inflows in July

As of June 2018, Canadian actively managed fixed income ETFs accounted for 42% of the total number of Canadian fixed income ETFs, or 24% of assets, says the report.

And, despite having higher fees relative to passive funds, many outperform their benchmarks.

Analyzing its own data along with Bloomberg data, National Bank finds that, among the current crop of Canadian active fixed income ETFs, those that beat their benchmarks tend to outnumber those that don’t, for periods between one and five years.

Beyond fees, the report says other important fund considerations include understanding that a manager’s “discretionary bets” can add risk beyond a fund’s stated objectives, and that active ETFs are less transparent than passive ones.

“Compared with passive ETFs, the process for selecting the right active ETF is additionally challenging because one needs to incorporate the human element,” says the report.

To assess that element, the bank assigns an active level score to various funds to describe the level of human activity within the ETF portfolio’s management. The score is based on nine fund characteristics, including duration and credit bets, security turnover and holding concentration.

“Funds with low active levels might be good alternatives to a passive core holding, while funds with high active levels should be considered as complement, satellite positions,” says the report.

For example, in the category of Canada-focused aggregate bond ETFs, WisdomTree Yield Enhanced Canada Aggregate Bond Index ETF has the lowest active level, which aligns with its “smart beta for fixed income” mandate, says the report. On the other end, Mackenzie Core Plus Canadian Fixed Income ETF and Invesco Tactical Bond ETF have higher—but still moderate—active levels, because of slightly increased high yield and international exposures.

For a full discussion on active ETF pros and cons, as well as a closer look at various categories of active fixed income ETFs and specific funds, see the full National Bank report.

Also read:

WisdomTree launches ETFs with exposure to China, Japan

When ETFs get active—in the boardroom

How to invest in currency ETFs