When the world’s first ETF was launched in Canada over 30 years ago, it was a fairly basic fund. It tracked the TSE-35 Index (the 35 largest companies in Canada listed on the TSX). Since then, ETFs have evolved enormously, but many people still think of them as simply replicating an index.
That couldn’t be further from the truth. Rather than being perceived as simple, “passive” investment funds, ETFs have grown to be increasingly sophisticated, with many having active management applied to them.
As of the end of September 2021, there were over 400 actively managed ETFs, worth $77.8 billion and accounting for over 20% of all ETF assets in Canada. The chart below illustrates the considerable growth of actively managed ETFs over the last few years:
But what exactly are actively managed ETFs? And how could they improve your portfolio?
Actively managed ETFs: a definition
In simple terms, an actively managed ETF is one that doesn’t merely attempt to replicate an index. More precisely, it is an ETF designed by an investment team that makes decisions regarding its underlying assets — differing from a traditional index (aka passive) investment strategy.
There are several sub-categories that would be described as actively managed ETFs, such as:
- Factor investing
- Option strategies overlay
- Asset allocation
- Individual securities selection
Actively managed ETFs can have a higher turnover in their underlying assets because the portfolio manager may trade the underliers more often to maintain their preferred balance. Portfolio managers aim to generate returns above and beyond those of the assets’ index.
While actively managed ETFs still offer the same flexibility and ease of trading of index ETFs, they also provide both individual and institutional investors with an efficient and affordable way of accessing a high level of expertise.
Let’s take a closer look at those four sub-categories of actively managed ETFs.
Factor investing ETFs
This investment approach has a bias that alters the performance from simply going up or down with the respective index. The idea is to target specific metrics to improve the rate of return and/or the risk level, when compared to the index.
Examples of a factor investing ETFs biases:
- Favouring the size of companies held (for example, holding large cap companies only)
- Preferring companies whose stock value is experiencing a rapid increase
- Only selecting companies that the management team considers to be undervalued
These ETFs can often bring greater diversification to a portfolio, as well as superior returns.
Option strategies overlay ETFs
These ETFs use options overlays to modify the expected behaviour of the underlying exposure, for example, to insure against market volatility and mitigate risk by hedging underlying positions, or to increase the portfolio yield.
One example is the Mackenzie Unconstrained Bond Fund (MUB). Its unconstrained approach is designed to deliver steady, higher income and use downside risk mitigation strategies to reduce volatility. The chart below shows how the put options on the high yield portion of this portfolio have helped mitigate drops in value when high yield assets have been more volatile.
Asset allocation ETFs
Asset allocators establish an investment strategy based on risk tolerance, time horizon and asset allocation. They then adjust the balance of assets within the fund according to current financial market conditions. These decisions can cover several asset characteristics, such as:
- Geographical locations
- Industry sectors
- Types of asset classes
- Hedged or unhedged positions
The funds are then rebalanced either by a pre-arranged schedule or can be triggered if the asset mix strays too far away from its target balance. Although there isn’t an individual security selection, the portfolio is actively managed at the asset allocation level, which can account for more than 93% of the variation of a portfolio’s returns.
As well as delivering diversification, these ETFs can bring you the peace of mind of having a portfolio that is rebalanced automatically to fit your risk profile. These actively managed ETFs have increasingly become the core of many portfolios, offering active management at a very low cost.
Examples of this style of ETF are the Mackenzie Growth, Balanced and Conservative Allocation ETFs (MGRW, MBAL and MCON). These have been very fast-growing funds, in part because they provide investors with highly efficient single-ticket solutions that suit different risk tolerances, at a low cost (from just 0.17% in management fees).
Individual security selection ETFs
Let’s look at fixed income ETFs first. Fixed income assets typically have three primary objectives: diversification away from equities, capital preservation and income generation.
In a low-rate environment, it’s difficult to achieve all three outcomes by adopting a buy-and-hold strategy. Active management has the potential to deliver higher yields and diversification while still mitigating risk. There are now around 150 individual security selection ETFs in the fixed income category (accounting for 40% of all fixed income ETFs in Canada).
Finally, let’s look at individual equity security selection ETFs. Given the difficulty of consistently outperforming a benchmark, actively managed equity ETFs offer different sorts of added value.
These include a concentration in specific sector allocations, a focus on environmental, social and governance (ESG) performance, non-benchmark-specific exposures and a variety of market segment or investment strategies.
The Mackenzie Ivy Global Equity ETF (MIVG), for example, is designed to provide added protection from market downturns while providing global diversification. Another example is the Mackenzie Global Women’s Leadership ETF (MWMN), which invests in companies that promote gender diversity and women’s leadership.
Find out more about actively managed ETFs
For investors, you can delve deeper into Mackenzie’s actively managed ETFs by checking out our ETF shelf or by talking to your your financial advisor. You can also find out more about the different types of ETFs in this recent blog. For advisors, please reach out to your Mackenzie sales team.
1 Investor Economics : ETF and Index Funds Report—Canada Q3 2021
2 Determinants of Portfolio Performance by Gary P. Brinson, L. Randolph Hood and Gilbert L. Beebower, 1986
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