Canadian ETF Investors Get Active

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David Stephenson

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David Stephenson, director, ETF strategy and development, CIBC Asset Management.

Active ETFs are now approximately 25% of the Canadian ETF market and account for almost 50% of total Canadian-listed ETFs, which are now over 1,000. In the U.S., active ETFs are approximately 3% of the market or $320 billion in AUM and account for 20% of U.S.-listed ETFs.

Active ETFs have grown significantly in the U.S. over the last year, and I expect that trend to continue in the years ahead. A new non-transparent structure that doesn’t require disclosure of daily holdings is a large reason why, providing a new wrapper for active managers to deliver their solutions and strategies. In fact, many large U.S. mutual fund managers are now bringing ETFs into the market. This growth will also raise visibility more, benefiting Canada as well. Active ETFs will continue to grow in Canada, in particular, fixed income, and global and international equity, which will be interesting to watch.

So, for example, we’re starting to see in Canada a lot of active international and global equity ETFs being launched. When you look at the valuations in the U.S. compared to outside international markets — Europe and EC markets in particular — there’s some pretty attractive valuations whether you’re looking at a price-to-earnings perspective, price to book, or price to cash flow. So, an active manager can essentially look into some of these markets and capitalize on opportunities where they see best value. So, I expect active international and global as Canadians allocate more of their portfolios outside of Canada in the years ahead will be prime beneficiaries of that trend.

This brings up the question and is always hotly debated, active versus passive. Index ETFs are the origin of the ETF market and account for approximately 70% of total AUM in Canada. Investors can essentially capture the return of an entire market or asset class with one trade and pay exceptionally low management fees. The benefits of index ETFs are well known and tested: broad diversification, low costs and have provided attractive returns of the market or asset class over time.

So, it’s really not a question of either/or, but active and passive can be complementary to portfolios. Investors can add incremental returns by using a combination of actively and passively managed ETFs. At the end of the day, there is enough product choice for investors to use ETFs to best benefit their portfolios and meet investor objectives and goals.