FEATURES
COVER STORY: ETFs SMART-BETA/ACTIVE ETFS While certain providers might find it difficult to gain a foothold in what is now a crowded marketplace, Mackenzie Investments is putting its faith in its new smart-beta suite. Smart-beta ETFs weigh their holdings according to complex formulas, including volatility, valuation and myriad other factors. Mackenzie joined the ETF space last year with four active fixed-income products and quickly followed with five smart-beta equity ETFs. That lineup has since expanded to add a new smart-beta emerging market equities ETF. “When we decided how we were going to enter the marketplace, we were very surgical,” says Anthony Chouinard, VP of ETF distribution at Mackenzie. “We wanted to make sure we had something that was different, innovative, and was needed by advisors and investors in today’s environment. That was why we went smart-beta and active ETFs.” Mackenzie’s smart-beta equity suite replicates the underlying indexes provided by TOBAM’s Maximum Diversification Index Series. TOBAM, an independent asset manager, uses its own methodology to select and weigh individual stocks to reduce correlations between holdings, making it a
natural partner for Mackenzie. “If you think about the equity side, it is about enhancing diversification and using the patented TOBAM methodology, which is not available anywhere else for retail investors,” Chouinard says. “Mathematically, this methodology will give the most diversified portfolios in different regions of the marketplace. At this stage of the market cycle, in the later stages of the recovery and with geopolitical and macro risks in the market, it makes a lot of sense to utilize the most diverse portfolio.” Last year saw government bond yields hit record lows during the summer, then bounce back after Donald Trump’s election fuelled a huge sell-off. Such volatility made Mackenzie’s decision to actively manage its fixed-income ETFs a wise one. “If you think of a typical passive structure for fixed-income ETFs, the biggest issues become your biggest positions,” Chouinard says. “For an aggregate bond ETF in Canada, you have a lot longer duration exposure than you might want because of the issuance of debt over the last few years. Basically, it exposes you to higher interest-rate risk and therefore capital loss in an environment when rates have gone up.” After almost a decade of ultra-low rates,
“One could argue we are at the end of a 35-year bull market in fixed income, so having an active manager is of huge value” Anthony Chouinard, Mackenzie Investments noises from the Fed seem to suggest that further rate hikes could be on the way after December’s increase, so active funds will have plenty of opportunities to gain solid returns. “Our portfolio managers were able to have
32
lower duration exposure and position themselves with bonds that are less sensitive to interest rate increases, so we have been able to outperform our passive benchmarks,” Chouinard says. “Being active has had huge value for investors.” Most recently, the firm introduced its Mackenzie Maximum Diversification Emerging Markets Index ETF (MEE) at the end of January – an indication that after a strong debut year, Mackenzie has every intention of carrying its momentum forward. “There are a lot of opportunities in these markets,” Chouinard says. “Most passive benchmarks in emerging markets, they tend to overexpose you to very large companies. A smart-beta strategy will provide the potential for added risk-adjusted returns.” Mackenzie is keen to redefine what ETFs can offer investors. While the industry has come a long way since the financial crisis, some misconceptions about these products still remain. “Traditionally, what investors and advisors associated with ETFs was low-cost market exposure,” he says. “The evolution of smart beta means ETFs can have exposure to specific factors or multiple factors. Active and smart beta is growing fast, although passive, market-cap and inexpensive is still the lion’s share of ETF assets.” Mackenzie has put its faith in the smaller end of the market, albeit the side with the most growth potential. As ETFs evolve, providers at the forefront of smart beta and active innovation will likely be the ones that thrive. “More education is needed among advisors and investors to understand what a smart-beta ETF is and why you use one in your portfolio,” Chouinard says. “Also, why would you choose active ETFs? One could argue we are at the end of a 35-year bull market in fixed income, so having an active manager is of huge value for an investment professional today.”
www.wealthprofessional.ca
22-41_Cover story-SUBBED4.indd 32
10/02/2017 6:59:02 AM