Active ETFs about to BOOM

Chris Meyer

Pinnacle Investment Management Limited

ETFs celebrated their 30 year anniversary globally in March. Canada was first out the blocks in 1990. Today the industry has $6 trillion in assets globally across 60 countries. The vast majority are passive ETFs that track an index. Before the ETF was the mutual fund, the first being in 1924, nearly 100 years old. In the US and Canada, ETFs now routinely outsell mutual funds. ETFs are increasingly becoming the investment vehicle of choice for investors because of their simplicity, affordability, liquidity and transparency (SALT). They are after all, not much more than listed mutual funds as Airlie/Magellan reminded us last week. 

Active ETFs, where the portfolio is actively managed, like the majority of mutual funds, are much younger with the first, also in Canada, about 10 years old. Assets in active ETFs are about $150 billion globally, only 2.5% of all ETF industry assets. An amazing stat given actively managed mutual funds are still >75% of total mutual fund assets in the US. Only a handful of countries currently allow active ETFs. This is about to change and active ETFs are about to BOOM. The US now allows active ETFs. We wrote about this on Livewire at the time here. The first one was listed on the 2nd April in the height of COVID (brave !). The big active managers in the US are now lining up at the SEC to list active ETFs on the US exchanges. Big things will happen there over the next few months that will lift active ETFs from the paltry 3.9% of total ETF assets in the US today, towards that of Canada, who has been doing active ETFs the longest, where 21% of ETF assets are actively managed. 

Australia, a top 5 savings market globally, is only 10 years into our ETF journey and 5 years into our active ETF journey with A$65 billion in total ETF assets. While growing at a healthy clip, the industry is still in diapers in terms of the growth ahead. Canada, with a similar size GDP and savings industry as Australia, has an ETF industry that is 4x the size of Australia and an active ETF industry that is 10x the size of us. ETFs make up only 2% of the total regulated managed fund industry FUM in Australia according to the ICI 2019 annual factbook. Canada is at 10.4%. The US is at 16.5%. ETFs and active ETFs in Australia are about to BOOM.  

To find out more about the ETF and active ETF trends in Canada and the US and what this might mean for Australia, Pinnacle hosted a webinar as part of our Listed Learnings webinar series with ETF guru Andres Rincon, Toronto based ETF strategist for TD Securities. The webinar replay can he found here. A copy of the slides are also attached. 

Some of the key take-outs from the webinar:

  • Canada, despite having a similar size savings market to Australia, has an ETF market ($220bn of FUM) that is nearly 4x the size of Australia’s ETF market ($63bn) with active ETF penetration in Canada (21% of ETF FUM) more than double that of Australia (9.3%).
  • The regulatory backdrop in Canada is very similar to Australia as is the type of investor who buys active ETFs, leading us to believe that Canada provides a good roadmap for optimism that the Australian active ETF market could be about to BOOM.
  • Fixed income active ETFs could continue to be a feature of new issuance and flows in Australia (~20% of active ETF FUM) as it has been in Canada (where it is 44% of active ETF FUM).
  • The buyers of active ETFs in Canada are overwhelmingly financial advisers, primarily in fixed income active ETFs. Advisers find the ease of investing in an actively managed bond portfolio via an ETF more accessible and efficient when compared to selecting individual bonds that have high minimums and differing maturity profiles making them harder to access and maintain for individual client portfolios.
  • The US is in the very early stages of active ETF growth (active ETF FUM is only 3.9% of total ETF FUM in the US vs 12% in Canada) but that is about to change given that it's taken nearly a decade to get approval from the SEC to allow active ETFs in the US and this approval was finally delivered earlier in 2020.
  • There appears to be substantial pent up demand to list active ETFs in the US from some big global name active managers and ETF players that should stimulate both the education about and adoption of active ETFs globally given how big the US ETF market is and how other markets tend to follow their lead. The US active ETF industry will be a ‘watch this space’ market over the next few months.

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Director
Pinnacle Investment Management Limited

Chris is part of the Pinnacle executive management team and responsible for driving the listed products business. Pinnacle’s mission is to establish, grow and sustain a diverse and complementary stable of world-class, specialist investment managers

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