Are passive ETFs passé?
While passive exchange-traded funds (“ETFs”) represent a significant majority of the capital flowing into the US$3.4 trillion global ETF industry, actively managed and strategic beta (rules-based) ETFs could be poised to quickly gain ground on their passive peers.
Actively managed and strategic beta ETFs are among the most popular types of strategies being launched by ETF providers. However, this news isn’t all bad for passive ETFs.
A rising tide is lifting all boats
The 2018 calendar year was rough on many investors, and the volatility that defined the period negatively impacted the ETF market. In fact, global inflows decreased by approximately 20% year-over-year from 2017.
Still, 2018’s US$516.1 billion in investor inflows was a significant amount, and this was the second-best year on record for inflows into the industry.1 So, even if passive ETFs’ market share actually declined, in absolute terms, interest in passive ETFs appeared to still be healthy.
The relationship between the different ETF strategies is … complicated
The shift into active and strategic beta ETFs is hardly the first time the relatively young ETF industry has undergone significant change.
Current trading volumes reflect an ETF market dominated by large professional investors, quantitative strategies and institutional investors. This is a far cry from the industry’s early days, when it was dominated by smaller, individual investors.2
In concert with the continued growth of the industry, and of active and strategic beta ETFs in particular, this shift could suggest increased investor sophistication and a greater investor comfort in using ETFs as part of more nuanced portfolio strategies.
Such strategies often involve combining active and passive investments to work in concert – for example, the “core-and-explore” investment strategy often begins with passive investments as the “core” by default.
This could help establish passive ETFs as important strategic components of a given portfolio, in addition to the benefits of their relatively low costs.
Changes in the ETF market occur quickly and often, which makes finding the correct positioning for your investment solutions essential. Contact us today at 1.844.243.1830 or info@ext-marketing.com to learn how we can help you better market your solutions in this ever-changing investment landscape.
Sources:
1 Chris Flood, “ETF growth sputters after markets’ ‘rocky ride’ in 2018,” Financial Times, January 11, 2019.
2 Ted Seides, “The Death of Passive Management?” Institutional Investor, September 9, 2018.
Learning from the U.S. experience in liquid alts
While liquid alternatives (“liquid alts”) are new to Canada, they’re already a mature market in the U.S. And Canada can learn a lot from the introduction of liquid alts in the U.S. marketplace.
Launches, launches and more launches
Going into 2019, dozens of liquid alts had already been launched in Canada. We believe liquid alt launches will continue to snowball in 2019 and 2020. Some firms will be more methodical and launch one liquid alt solution at a time. Other companies will launch entire suites of liquid alts and see what resonates with advisors and investors.
One of the many interesting things to watch for will be the strategies that are most favoured by investors. Long-short equity, market neutral and non-traditional bond funds have been successful in the U.S. It’s likely that one of these will stand out from a sales perspective in Canada as well.
Another unknown is whether mutual fund or exchange-traded fund (“ETF”) versions of liquid alts will be more popular. The answer might simply come down to accessibility for advisors.
Education
Although this is a newer investment type and there is still a lot of uncertainty about liquid alts, many companies are going to launch liquid alt mutual funds and ETFs before they have educational content ready – and this could cause some problems.
Why? Because advisors and investors may not fully understand these new solutions, and getting people to review content after they’ve already started selling/buying liquid alts might be difficult. But educational content is – and has always been – key in successfully understanding the features, benefits, risks, etc. inherent in any investment solution.
We believe the best advice for any firm planning to launch liquid alt strategies is to get your content – specifically content geared toward educating investors and providing value to advisors – ready before your launch. This might be a challenge, but ext. can help.