Disruptive innovation comes to Canadian ETFs

Sensing a hole in the Canadian ETF landscape, Emerge Canada sought to fill it with its own take on technology

Disruptive innovation comes to Canadian ETFs

Emerge Canada came to the Canadian marketplace in July 2019 with a suite of five technology-focused ETFs. That was daunting enough – and Emerge had no idea what kind of environment was lurking around the corner. However, the asset manger’s ETFs, subadvised by ARK Investment Management and portfolio manager Catherine Wood, were not only able to weather the storm of the selloff in March 2020, but also turned in impressive performance over the course of the year.  

As a result, Emerge has seen its AUM grow from $10 million in 2019 to $204 million as the end of 2020 –the most of any Canadian ETF provider, according to National Bank Financial Markets. Leading the way is its flagship ETF: the Emerge Global Disruptive Innovation ETF (EARK), which builds on the relationship Emerge had forged with ARK in the US. 

“We saw while there is an increased number of active ETFs coming to the market in Canada, there wasn’t anyone focused on disruptive innovation in the manner that ARK does,” says Lisa Langley, president and CEO of Emerge Canada. “ARK address the key fastest-growing, general-purpose technology platforms, and each one of the ETFs represents them. EARK is really the aggregator – a ‘best picks’ approach – where Wood looks at the themes and determines her preferred holdings to be in the flagship fund. To the best of our ability, we follow what ARK is telling us to do, which is the same way they are executing in the US. There may be some timing differences or Canadian concentration limits, but in every instance, we try to do the same.” 

The selection process for EARK is very disciplined and involves both a top-down and bottom up approach. ARK begins with a macroeconomic understanding of the marketplace and then performs a bottom-up analysis.  

“The key in stock selection is ARK has subject experts with deep domain expertise,” Langley says. “They look at things companies are doing that may not be recognized by others who do not have that expertise. This is anything but a pure financial exercise.” 

By not confining its analysis to an economic perspective, ARK’s management team is able to use their knowledge of the domain and really determine if a company has the means to prosper long-term – an approach that helped EARK perform during the turmoil caused by the pandemic. Langley notes that while some funds and indexes were down 25% to 45% in March, EARK was only down between 12% and 15%.   

“The grace of the situation is that everything the world needs to conquer the pandemic and work more efficiently is related to technology,” she says. “Everyone is leaning into technology, so EARK didn’t have to pivot – it was already there. I was overjoyed that the investment thesis for the holdings prevailed and actually were showing more resilience and opportunity.” 

Many of the themes EARK and Emerge’s other ETFs invest in – including fintech, e-commerce, artificial intelligence and deep learning, genomics, and industrial innovation – were accelerated by the pandemic, Langley points out. 

“Everything that ARK was investing in and continues to invest in is needed by the world,” she says. “It is the right place and right time with the needs that are important to all of us every day. All of the themes benefit other areas, so they are top of mind, and there are opportunities.”   

Langley’s goal was always to bring innovation – specifically technologies that can improve the world – to the forefront. Even though Emerge had a similar product in the US, she felt it was important to have a Canadian version.  

“Philosophically, I wanted a presence for Emerge in Canada and to do things properly by creating ETFs for Canadian investors and selecting the best subadvisors we could,” she says. “While US-listed ETFs can be purchased by Canadians, they are not in the best intertest of Canadian residents and investors from tax and estate planning perspectives.”  

With all-technology portfolio like Emerge’s, Langley does note that volatility is a risk. That’s why Emerge doesn’t suggest EARK as a core holding, but rather a satellite to diversify and accelerate growth. Still, she points out that if March was the worst-case scenario and investors are taking a long-term approach, then volatility is a minor factor. She says ARK’s investment process, with its focus on deep expertise and research, is geared toward the long-term and is not distracted by the occasional volatility.  

Langley believes investors and advisors need to consider investing in innovation – its ability to solve world problems brings huge growth potential.  

“These problems exist in every area,” she says. “All of these technologies solve problems and are needed. They also enable and spawn other technologies. Advisors should look to allocate to innovation so clients and portfolios can benefit from long-term trends of accelerated, uncorrelated growth from companies creating solutions to these world problems.”