We asked an industry expert about the state of active ETFs in Canada
It’s been a tough five years for active managers, many of whom have struggled to outperform the benchmark. Yet, despite the fact that actively managed funds have continued to lag indexing passive exchange-traded funds this year, some industry insiders believe that active ETFs have an important role to play in portfolios. But why have active strategies been struggling?
“We’ve found that cost of investment has been the largest factor preventing actively managed ETFs achieving outperformance,” says Head of Product at Vanguard Investments Canada, Tim Huver. “Traditionally, in Canada, investors have been paying 1%, and sometimes more than 2%, for actively managed strategies. It’s been tough for active managers to overcome that fee and then also outperform the benchmark.”
When Vanguard launched four new low-cost actively managed exchange-traded funds in June, it was considered something of a milestone. Trading on the TSX, they were the first actively managed ETFs launched by the firm in Canada. “Our actively managed ETFs are each designed to target a factor exposure: value, momentum, liquidity and minimum volatility,” Huver says. “They have management fees of 35 basis points, and we think they provide a viable alternative to higher cost active management. There will be increased cost competition in the active space going forward, which will ultimately help the end investor.”
With investors focusing more closely on cost, advisors’ fiduciary responsibilities and product selection, advisors are having to rethink their roles and increase their client value proposition. “Advisors are being forced to move away from picking single stocks or selecting the latest hot fund, to offer holistic planning, asset allocation, tax planning and management of behavioural finance,” Huver says. “Today, advisors really have to understand their clients’ objectives and risk tolerances and then provide holistic advice. The product landscape is becoming more complex, so advisors can really add value by helping their clients understand the products that are available.”
Although times have been tough for actively managed ETFs, Huver believes the fight back is on. “We have seen a 20% growth of cash flow into actively managed mandates over the past 12 months,” he says. “We are also seeing more core-satellite approaches to portfolio construction: the use of active and passive combinations.”
“We’ve found that cost of investment has been the largest factor preventing actively managed ETFs achieving outperformance,” says Head of Product at Vanguard Investments Canada, Tim Huver. “Traditionally, in Canada, investors have been paying 1%, and sometimes more than 2%, for actively managed strategies. It’s been tough for active managers to overcome that fee and then also outperform the benchmark.”
When Vanguard launched four new low-cost actively managed exchange-traded funds in June, it was considered something of a milestone. Trading on the TSX, they were the first actively managed ETFs launched by the firm in Canada. “Our actively managed ETFs are each designed to target a factor exposure: value, momentum, liquidity and minimum volatility,” Huver says. “They have management fees of 35 basis points, and we think they provide a viable alternative to higher cost active management. There will be increased cost competition in the active space going forward, which will ultimately help the end investor.”
With investors focusing more closely on cost, advisors’ fiduciary responsibilities and product selection, advisors are having to rethink their roles and increase their client value proposition. “Advisors are being forced to move away from picking single stocks or selecting the latest hot fund, to offer holistic planning, asset allocation, tax planning and management of behavioural finance,” Huver says. “Today, advisors really have to understand their clients’ objectives and risk tolerances and then provide holistic advice. The product landscape is becoming more complex, so advisors can really add value by helping their clients understand the products that are available.”
Although times have been tough for actively managed ETFs, Huver believes the fight back is on. “We have seen a 20% growth of cash flow into actively managed mandates over the past 12 months,” he says. “We are also seeing more core-satellite approaches to portfolio construction: the use of active and passive combinations.”
