ETF growth continued in volatile 2020, but strategies are evolving

“The challenge is, and the opportunity is, to come to market with clearly differentiated offerings,” says Barry Gordon, managing director and head of Canadian retail asset management. “We’re not looking to launch ETFs that provide exposure to every asset class, every geography. That is not our business plan.”

Guardian’s most distinctive offerings are the Guardian Directed Equity Path and the Guardian Directed Premium Yield ETFs, which hold global stocks in combination with a “collar” options strategy. Put options protect the Guardian ETFs against plunging markets, while the premiums received from writing covered calls are used to pay for the puts.

The funds are aimed at older investors who are in the decumulation stage and can’t risk steep losses.

“We’re taking a much more outcome-oriented approach that maps to the financial life cycle of an  individual,” Gordon says. “We will continue to launch new solutions where there is a clear and differentiated opportunity to solve problems.”

Of the other new firms, Toronto-based Russell Investments Canada Ltd. created ETF series of four of its mutual funds. Caldwell Investment Management Ltd., also of Toronto, and Calgary-based Norrep Capital Management Ltd. each created an ETF series of just one of their mutual funds.

Among the established ETF providers, there is a significant expansion of environmental, social and governance (ESG) mandates. The most recent contenders include Invesco Canada Ltd., which added Canadian equity and Canadian fixed-income ESG strategies in October to complement a U.S. equity strategy launched in March.

“Although demand is small right now we think it’s going to grow significantly in the coming years,” says Hussein Rashid, vice-president and ETF strategist with Toronto-based Invesco. “Bringing out product before the full-on growth is very important because clients like to look at strategies that have some sort of track record.”

With its equity ETFs based on S&P 500 ESG and S&P/TSX Composite ESG indexes, Invesco aims to be a low-cost provider with similar risk-return profiles to that of the broader market. The concept is “really just getting rid of the worst performing within each industry,” Rashid says.

“A lot of clients want to have some sort of sustainability impact with their investments, but at the end of the day they still want returns,” Rashid adds. “They still want to not underperform the broader market.”

During the pandemic, however, ESG strategies have generally beat the broad market benchmarks.

The most extensive ESG rollouts in 2020 were from the two largest providers. Back in January, Toronto-based BMO Asset Management Inc. launched seven ETFs, mostly based on MSCI equity indexes. Market leader BlackRock Asset Management Canada Ltd., also of Toronto, introduced its own MSCI-based equity ETFs in April, followed by four multi-asset ESG portfolio ETFs in September.

Among others, Montreal-based National Bank Investments Inc. launched three actively managed NBI Sustainable ETFs, and Toronto-based TD Asset Management Inc. (TDAM) received prospectus approval in late October for a trio of ETFs based on Morningstar ESG indexes.

As a group, the ETF class of 2020 is altering the mix of the ETF universe. Fewer new offerings are traditional market-cap-based index funds. Most new products are either fully actively managed, or else rules-based mandates that are subsets of broad market benchmarks.

The growth rate of active management has been impressive, says Ahmed Farooq, vice-president, ETF business development, with Toronto-based Franklin Templeton Investments Corp. Citing research obtained from National Bank Financial, Farooq said assets of active ETFs as a whole grew at 26% in the 12 months ended Sept. 30, while passive grew at 24%. But active fixed-income ETFs grew 45%. Of the 995 ETFs in Canada as of that date, according to NBF, 45% or 447 ETFs were active.

“You’re starting to see some movement where I think some advisors or investors have maxed out on how much passive they want,” says Farooq. “They may buy some low-cost core, but then they want to complement it with an active manager that can do different things than what the benchmark can do.”

To that end, Franklin Templeton’s newest ETF, launched in October, is the Franklin Global Growth Active ETF. Its underlying holding is a retail mutual fund managed by a Franklin Templeton Institutional LLC team based in New York. The ETF is essentially a “carbon copy” of the top-quartile mutual fund, says Farooq. This enables advisors to view the strategy’s performance history and to choose the fund structure that best suits their business model.

Elsewhere in equity categories, new 2020 choices in active management include international dividend and infrastructure ETFs managed by Toronto-based 1832 Asset Management LP under the Dynamic brand name, and global equity, U.S. dividend and infrastructure ETFs from TDAM.

On the fixed-income side, the most ambitious expansion in 2020 is that of Toronto-based CI Investments Inc., which operates as CI Global Asset Management.

“We feel active management will become increasingly important, as investors will no longer be able to rely solely on declining interest rates to generate returns as they have with passive mandates,” says Roy Ratnavel, executive vice-president and head of distribution. “Credit and duration management will be of paramount importance if investors expect to get the same benefits from fixed income that they did in the past.”

In May, CI launched a suite of ETFs sub-advised by Los Angeles-based DoubleLine Capital LP, which is headed by the high-profile Jeffrey Gundlach and currently manages more than US$140 billion.

Also new from CI in 2020 are fixed-income ETFs managed by affiliates Lawrence Park Asset Management Ltd. and Marret Asset Management Inc., both based in Toronto, and two fixed-income mandates in CI’s liquid alternatives lineup.

“We believe the expansion of our fixed-income lineup in 2020 helps investors gain exposure to differentiated strategies by world-class fixed-income managers,” says Ratnavel.

On another front, taking a page from the most popular type of mutual fund, ETF providers continued to roll out multi-asset products. Designed as “one-stop solutions,” the new additions include four Mackenzie asset allocation ETFs and a trio of TD One-Click ETFs.

As Michael Craig, a TDAM managing director, said when the TD One-Click suite made its debut in August, ETF portfolios are a convenient way for investors to diversify “even if you only have a small amount of cash to invest.” The growing number of these fund-of-funds products underscores that ETFs, again outselling mutual funds this year, have become mainstream investments accessible to the full range of retail investors.