(Bloomberg) — Actively managed exchange-traded funds are surging in Canada, posing a challenge to the mutual-fund industry that has the highest management fees in the world.
Assets in actively traded ETFs jumped to about $7.33 billion as of May 31, up almost 50 percent from a year ago, according to data compiled by Bloomberg. The funds, which hire portfolio managers to pick stocks, have also outperformed their index-trackingETFpeers this year and now make up about 11 percent of Canadas $69-billionETFindustry, the most among developed markets, the data show.
Actively managed ETFs have been the largest driver of asset growth for our business over the last three years, said Steve Hawkins, co-chief executive officer of HorizonsETFManagement Canada Inc., best known for its leveraged ETFs. More than half of Horizons C$4.65 billion ($3.7 billion) assets under management are now actively traded funds, Hawkins said in an interview at Bloombergs Toronto office.
The rise in active ETFs come as Canadian securities regulators implement new rules to improve cost transparency in a country where mutual-fund fees are the worlds highest, according to a Morningstar report.
Under Client Relationship Model Phase 2 amendments, firms will be required to provide more detailed account statements, and beginning in 2016 will have to submit annual reports to clients showing how much advisers were paid for products and services.
D Minus
For investors who want to remain in active funds, Horizons will start to look a lot more attractive, said John Gabriel, an analyst at Morningstar in Chicago. With their ETFs theyre looking to take a chunk of the mutual-fund pie. People may see their products and start to migrate.
Canadian mutual funds received a grade of D- on fees, the worst out of 25 countries in a June Morningstar report. The U.S., Australia and the Netherlands tied for the best scores in the gauge, which measures ratios across different categories. Canadian management expense ratios average 0.61 percent for ETFs and 1.86 percent for active mutual funds, according to Morningstar. Active ETFs average 0.66 percent, Bloomberg data show.
Horizons Active Canadian DividendETFhas fees of 0.7 percent and posted a total return of 63 percent in the past five years, compared with 50 percent for its benchmark, the Standard & Poors/TSX Canadian Dividend Aristocrats Index.
Actively managed ETFs in Canada climbed 4.1 percent on average in the 12 months through June 29, compared with a 2.5 percent advance in passive ETFs, according to data adjusted for asset size compiled by Bloomberg. Active equity ETFs have surged 6.9 percent, ahead of a 2.8 percent advance for passive equity ETFs, the data show.
U.S. Lags
While active ETFs are taking off in Canada, they account for only about 1 percent of the $2.1 trillion U.S.ETFmarket. The return of U.S. active ETFs has dropped 1 percent in the past year, compared with a 2.6 percent increase for passive.
The funds have struggled to gain traction in the U.S. because Americans tend to put more emphasis on cost when choosing investment vehicles to save for retirement, said Eric Balchunas, a Bloomberg Intelligence analyst in Skillman, New Jersey.
As well, in contrast to the U.S., Canadian regulators dont require firms to disclose their holdings daily, Hawkins said. That reduces concerns over competitors front-running trades.
On the bond front, active ETFs dont always have to sell assets to match an indexs move, reducing liquidity qualms, he added. Horizons C$555-million Active Corporate BondETF, managed by Fiera Capital Corp., is among the firms best sellers.
ETFTestbed
Hawkins, 47, took over in March as co-CEO of Horizons, a unit of Seoul-based Mirae Asset Global Investments Co. He primarily focuses on day-to-day operations of the firms Canadian, U.S. and Colombian operations while Co-CEO Taeyong Lee oversees the firms global businesses.
Horizons faces growing competition in actively managed ETFs including from First Asset Investment Management Inc., which has rolled out several products since September, including the First Asset Active Canadian DividendETF.
Canada has been an investment testbed since it debuted the worlds firstETFin 1990 with the Toronto 35 Index Participation Units. Horizons launched the worlds first leveraged commodityETFin 2008. Its more recent products have included anETFbased on trades of corporate insiders.
ETFassets under management climbed to a record C$85.1 billion as of May 31, according to data from the CanadianETFAssociation. Horizons has a 5.5 percent market share while leader BlackRock Inc.s iShares has 54 percent, followed by Bank of Montreal and Vanguard Group Inc.
Most Conservative
The industry remains small compared with the mutual fund market, whose assets have advanced 8 percent this year to a record C$1.23 trillion as of May 31, according to data from the Investment Funds Institute of Canada.
I dont think were feeling any particular threat from ETFs, said Ian Bragg, senior manager of research and statistics at Investment Funds Institute of Canada. We see mutual funds and ETFs as different products serving different needs and they can work together.
Still, some of Canadas biggest mutual fund providers are investigating getting into ETFs, including Toronto-Dominion Bank and Mackenzie Investments, a unit of IGM Financial Inc, that manages about C$75 billion.
Mackenzie Investments is still in the exploration phase and have made no decisions at this time on pursuing ETFs, said Jeff Carney, CEO of Mackenzie, in an e-mail.
Toronto-Dominion CEO Bharat Masrani told reporters in March the lender may resume offering ETFs in Canada after exiting the business in 2006. Meghan Thomas, spokeswoman at the lender, declined to comment.
Canadians are among the most conservative investors in the world and even with the incoming rule changes are unlikely to abandon investment advisers en masse for ETFs, said Brian Gooding, head of distribution at Mackenzie.
Wild West
There will be a subset of people who decide theyre not getting value, Gooding said. It will be minimal. Mackenzie offers fees as low as 0.85 percent on equity mutual funds for do-it-yourself investors, Gooding said.
Horizons push into active ETFs will help the company double its assets past C$10 billion in the next five years, Hawkins said.
The perception has been theyre the Wild West, leveragedETFprovider but theyve quietly amassed assets in the actively managed space, Morningstars Gabriel said. Theyve done a nice job moving away from that reputation.
