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-tracking ETF peers this year and now make up about 11 percent of Canada’s $69-billion ETF industry, 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 Horizons ETF Management Canada Inc., best known for its leveraged ETFs. More than half of Horizon’s C$4.65 billion ($3.7 billion) assets under management are now actively traded funds, Hawkins said in an interview at Bloomberg’s 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 world’s 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.
“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 they’re 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 Dividend ETF has 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 & Poor’s/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.