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says his firm hasn’t changed its product-development plans, but that it is being careful about the timing of launches. No one wants to release a product into the “extreme market dislocation” that happened in Febru- ary and March, he says.
Mackenzie didn’t launch any new products in the first half of 2020, but filed a preliminary prospectus for 13 ETFs in July.
Gopaul splits investors in the pandemic environment into three broad camps. The first is looking to preserve capital with quality, low volatility and fixed-income products. The second is “swinging for the fences” and chasing the market rebound through growth equities, believing central banks’ quantitative easing will last forever. The third is saying, “The world has changed forever and how do I adapt to it?” These investors are seeking safe havens, such as gold.
In the first half of the year, inflows went primarily to established asset classes such as broad equity, Canadian aggregate bonds and cash. The Canadian funds that reported the largest inflows from January to June, according to National Bank, were broad equity index ETFs from Horizons and BMO; Horizons’ Canadian bond universe ETF; and CI First Asset High Interest Savings ETF.
“There’s not a lot of opportunity for a product provider to be capturing [investors] outside of those spheres,” Noble says, adding that “there’s a race to the bottom on fees” in the broad equity and bond categories.
Capitalization-weighted index funds reported net inflows of $10.7 billion, almost half of all inflows from January to June — and far more than any other category.
But sector ETFs ($2.2 billion in net inflows) and thematic ETFs ($1.3 billion) also performed well in the first half of this year, surpassing inflows for dividend ($580 million) and factor funds (which reported net outflows).
That enthusiasm could continue as manufacturers consider strategies for capturing the winners in the post-Covid environment.
A new case for niche ETFs?
BMO has never put much emphasis on thematic products, but the uncer- tain environment has the firm considering new approaches.
“If you look at our lineup, we’re not big in that space,” Gopaul says. “Other companies have carved out their niche by offering niche products. It’s something that’s in focus for us now, but it wasn’t before the pandemic.”
However, Gopaul would eschew “fast money” products that could turn out to be based on fads. Rather, he describes BMO’s strategy as “more scalable thematics” built around secular trends.
Lala — whose company has carved a niche in niche products — says the market sell-off this year validated Evolve’s approach. The com- pany’s cybersecurity, health-care and e-gaming ETFs were among the few to escape March’s carnage relatively unscathed. In the first week of August, Evolve’s global health-care ETF was up by 4% year-to-date, the cybersecurity fund was up by 38%, and the e-gaming ETF had gained 47% (all CAD-hedged versions). “When we showed that to [financial] advisors, I think it started to pique a lot of interest,” Lala says.
Toronto-based Emerge Canada Inc. also reported strong performance for the actively managed niche funds it launched in July 2019; those ETFs are subadvised by New York-based ARK Investment Management LLC. In the first week of August, Emerge’s genomics and biotech ETF was up by 67% for the year to date, the disruptive innovation ETF was up by 66%, and the artificial intelligence and big data fund had gained 74%.
Products designed to capture the Covid moment have begun to emerge south of the border. In June, New Jersey-based ETF Managers Group LLC launched a biotech ETF (NYSE: GERM) that offers exposure to companies testing vaccines and treatments for infectious diseases. The same month, New York-based Direxion Shares ETF Trust launched a work-from-home ETF (NYSE: WFH) focused on cloud computing, cybersecurity, document management and remote communication such as video conferencing.
Canadian ETF manufacturers have had to adapt to remote distri- bution. Fortunately, the adjust- ment allowed manufacturers to
get their messages out faster, Gopaul says: “We can think about launching thematic prod- ucts and supporting them more efficiently than we could in
the past, and discuss portfolio construction around them,” Gopaul says.
Remote working and lock- downs have upended traditional distribution models. There’s no more knocking on doors and selling products over lunch sem- inars and rounds of golf, Gopaul says: “We have to look at things differently now, which has also led us to think about designing products differently too.”
Lala says he’s trying to assess whether the pandemic will permanently change the sales model of wholesalers sitting across from advisors and pitching prod- ucts. In the meantime, Evolve has been hosting webinars every week with groups of 50 or so advisors.
One challenge in selling thematic products during the long bull run was explaining to advisors how exposures fit into portfolios. A world in flux has made people more receptive to picking themes that could be winners. “That’s one of the key catalysts,” Gopaul says.
Battleground ESG
Investment flows into ETFs focused on environmental, social and governance (ESG) factors totalled $1.2 billion in the first six months of the year, according to data from Montreal- based National Bank of Canada. Those gains represent 75% of the category’s assets at the start of the year, and many experts believe the momentum is going to continue.
“The fight for ESG is going to be the biggest battleground over the next two years,” says Mark Noble, senior vice president, ETF strategy, with Horizons ETFs Management (Canada) Inc. in Toronto. “Those products did really well from a performance standpoint, so the moment’s come for ESG. A
lot of the big asset managers are putting millions of dollars into product development and marketing.”
Reports from the Washington, D.C.-based Institute of International Finance and Chicago-based Morningstar Inc. showed that many ESG indexes held up better than others during the market sell-off.
“The money hasn’t come in yet,” Noble says, “but when it does, it will come in a big way.”
New ESG products will have more rigorous inclusion criteria and feature hard screens, Noble adds. “That’s where there’s going to be a push: really trying to establish, ‘Is this responsible investing, or is this just what we call greenwashing?’” — Mark Burgess
6 Investment Executive’s ETF Guide 2020
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