The advantages of exchange-traded funds (ETFs) — lower costs, intraday liquidity and tax efficiency compared with many other investment structures — are well documented. Yet many Canadian investors remain loyal to mutual funds. What if you could combine the cost efficiency of ETFs with the professional strategy management offered by traditional mutual funds? A new generation of ETFs arriving in Canada aims to do exactly that.
Traditional mutual fund providers have felt the pressure from the rapid rise of ETFs and are responding by launching their own ETF offerings. In April 2022, ETFGI, an independent research and consultancy firm that tracks ETFs globally, reported a 22% compound annual growth rate in smart‑beta ETFs over the previous five years. That growth has encouraged established managers to bring active, factor and smart‑beta ETF strategies into the Canadian market.
Several well‑known asset managers have already introduced such products in Canada. Manulife, for example, launched ETFs managed by Dimensional Fund Advisors, a U.S. firm known for applying academic, factor‑based models to portfolio construction. Franklin Templeton, historically focused on active mutual funds, has also expanded into ETFs. Major ETF providers such as iShares, BMO, Vanguard and Horizons have added factor and smart‑beta ETFs as well. The result is a broader set of ETF styles and strategies for Canadian investors to consider.
More ETFs mean more choice
“Clients are asking about ETFs, and that demand is growing globally,” says Patrick O’Connor, global head of ETFs for Franklin Templeton Investments. Templeton plans to expand its ETF lineup in Canada, but the firm emphasizes active management rather than competing in the crowded passive index space. “Our DNA is active,” O’Connor explains.
Among thematic focuses, low‑volatility and multi‑factor ETFs have been prominent, although some of these segments experienced modest outflows year‑to‑date in 2022. Environmental, social and governance (ESG) ETFs saw the largest percentage increase in flows relative to assets under management among the segments noted in recent industry reports.
Too much choice?
More ETF choices are a benefit, but they also create complexity. “It’s exciting for investors, and terrifying for investors,” says Mark Yamada, president and CEO of Pur Investing, which builds ETF portfolios for individuals and institutions. The expanding range of ETF strategies — from pure passive index products to active, smart‑beta and factor funds — can make it harder for everyday investors to evaluate their options.
Yamada points to research by Sheena Iyengar at Columbia University showing that while people notice a wider choice set, too many options can be paralyzing. When faced with an overwhelming number of alternatives, some investors delay decisions or avoid choosing altogether. That effect is important to consider as Canada’s ETF ecosystem grows: as of Aug. 31, 2022, the market included 42 ETF sponsors and 1,010 funds managing $324 billion in assets. With this breadth, individual investors may increasingly look to financial advisors or robo‑advice platforms for help building diversified portfolios that match their goals.
One clear benefit of new entrants is fee pressure. Increased competition among ETF sponsors tends to push management expense ratios (MERs) lower. For example, some of the newer ETF series from traditional managers typically charge between 0.3% and 0.6%, whereas comparable active mutual funds from the same firms can carry MERs above 2%. Since investment returns are uncertain, keeping costs low is one of the few factors an investor can control reliably.
Competition is keeping costs down
Lower fees and more strategic options make ETFs an attractive alternative to higher‑cost mutual funds, but investors still need to assess whether smart‑beta or active ETFs fit their objectives and risk tolerance. Factor‑based ETFs follow strategies grounded in academic research that aim to capture premiums such as value, momentum or quality. Active ETFs attempt to add value through manager decisions while retaining many structural benefits of ETFs.
Only time will reveal whether smart‑beta or active ETFs outperform traditional passive ETF offerings over the long term. In the meantime, investors should focus on fundamentals: clear objectives, appropriate asset allocation, low costs, tax efficiency and understanding the rules and risks of any ETF they hold. For many Canadians, the expanding ETF landscape offers both opportunity and complexity — and, for many, it underscores the value of thoughtful advice when constructing a long‑term investment plan.
More about ETFs:
- How to choose ETFs for your investment portfolio
- How to evaluate ETFs based on financial reports
- What seasoned investors look for in an ETF prospectus
- The importance of asset allocation
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