Active ETFs proliferate as asset managers try out new strategies
Although there are more than 1,500 ETFs in Canada, asset managers say active ETFs create more room for product innovation.Angelina Bambina/iStockPhoto / Getty Images
Canadian and U.S. asset managers continue to launch active exchange-traded funds – far surpassing the number of new passive ETFs – and that trend is expected to continue as they look at new innovations.
“Active is not dead. Active will never die,” said Ben Johnson, head of client solutions with Morningstar Inc. in Chicago, at a Morningstar event in Toronto earlier this month. “Active will continue to evolve.”
In the U.S., more investment dollars are going to passive index-based funds – both mutual funds and ETFs – than active funds, with cumulative net flows of passive funds rising steadily since the early 1990s and cumulative net flows for active funds easing gradually since 2022.
Part of that has to do with the shift to fee-based advice as well as the change in demographics, with older investors who’ve had success with active funds moving investments to passive strategies to “take some money off of their piles,” Mr. Johnson said.
However, there’s been an uptick in money invested in active ETFs, specifically, which has been “a bright spot for active strategies,” he said. Active ETFs accounted for about 8 per cent of the overall U.S. ETF market at the end of September, but one-quarter of all ETF inflows this year have gone into active funds.
Asset managers have noticed, with active ETFs accounting for more than three-quarters of total launches in the U.S. this year, up from only 9 per cent in 2015. And many passive strategies, such as crypto, have a much more “active” feel, he noted, and don’t just aim to follow a traditional index.
Many asset managers are also targeting their new products to be used in model portfolios – an all-in-one type of product that can include passive and active ETF strategies from a variety of providers – that are meant to be used by advisors as portfolio building blocks. These trends are also showing up in Canada.
Graham Mackenzie, managing director of exchange-traded products at TMX Group, said at the Morningstar event that the nature of Canada’s markets – concentrated in the energy, materials, precious metals and banking sectors – requires investors to be active to manage concentration risk effectively.
Speaking on the same panel, Ian Tam, director of investment research at Morningstar Canada, said Canadians “love to invest actively.”
Recent data from National Bank of Canada Financial Markets noted that in October, 14 of 15 new ETFs launched were actively managed. Four of those ETFs were from Capital Group Canada and two were from JP Morgan Asset Management (Canada) Inc. In the first six months of 2024, 93 of the 122 new ETF listings in Canada were actively managed.
There’s no lack of options in ETFs for either U.S. or Canadian investors, Mr. Tam pointed out, with 3,900 ETFs listed in the U.S. and 1,530 ETFs in Canada, according to Morningstar data.
With Canada being one-tenth the size of the U.S. market, that’s a lot of product here, Mr. Tam suggested.
But Greg Walker, director of ETF capital markets and strategic relationships with BMO Global Asset Management, told the Morningstar audience that innovation means trying new products as investor opinions change over time.
For instance, he said fixed-income ETFs took a while to catch on as investors were accustomed to buying individual bonds. Now, fixed-income ETFs are “one of the fastest-growing areas across the globe.”
The same pattern followed with ETFs for gold, covered calls and cryptocurrency, he added. “Appetites change. You have to put stuff out there and you have to be willing to shut stuff down” when the market doesn’t respond.
BMO GAM recently launched a suite of buffer ETFs, meant for downside cushion, and accelerator ETFs to double exposure to a particular sector or market.
“It’s brand new for us,” Mr. Walker said. And while the products require a lot of investor education, “you’ll see more of that kind of innovation coming from us,” including products using swaps and options within ETFs.
Another new type of product being considered by providers is ETFs or other products that provide access to private assets, Mr. Johnson said.
Interval funds, which allow investors to invest or sell at specific times, are a start, he said, adding that model portfolios will “seamlessly integrate” private investments as part of a “bigger solution.”
Mr. Walker noted that BMO GAM has teamed up with large private asset firms in the U.S. to offer funds that focus on private markets.
With 4,000 investment funds in Canada holding more than $2.5-trillion in assets, combined, “ETFs are still only a small portion of the fund business,” Mr. Mackenzie noted, with about $478.5-billion in assets at the end of September, according to Investment Funds Institute of Canada data. “For new entrants, there’s still an opportunity to look at entering the space.”
Any new product should offer a solution for investors, Mr. Johnson said. And just because asset managers can launch a product – such as highly leveraged funds – doesn’t mean they should. Products such as target maturity funds and fixed-income products are “solving a true investor problem,” he said, and “everybody walks away with a winner.”