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railroad track

Call it exchange-traded fund (ETF) creep. Slowly but surely, ETFs are making headway in the active space, and not just because more and more active managers have quietly started using them in their own funds. Active ETFs are, according to a report from National Bank, experiencing somewhat of a boom, especially in the U.S., where more and more pension funds, endowments and sovereign wealth funds are turning to fixed income ETFs to beef up liquidity and make sure there is ready cash on hand in case it’s needed.

What’s interesting is that the active ETF space seems to be growing along a different track in Canada than it is in the U.S., as ETFs continue to play different roles in the two countries. Indeed, south of the border, fixed income rules. According to the report, the top four active funds all deal with debt: the PIMCO Enhanced Short Maturity ETF (MINT), the PIMCO Total Return ETF (BOND), the WisdomTree Emerging Markets Local Debt Fund and the WisdomTree Asia Local Debt Fund. Together, the four giants account for 75% of the active ETF space. Much of the trend has been driven by a growing appetite for fixed income ETFs, especially in the pension and endowment space in the U.S. According to PIMCO, for example, at least 10% of its US$8.2 billion in ETF assets under management is held by pension funds, endowments and sovereign wealth funds according to Pensions & Investments. In the year ahead, according to the same report, active ETFs in the U.S. are set to grow exponentially in the year ahead, doubling in size up to US$10 billion held in 55 funds.

Here in Canada, the active ETF space is growing, but the pace is slightly more tempered and the focus is different. Assets in Q3 2012 hit an impressive $4 billion, concentrated in 47 active ETFs. Unlike the fixed income-focused U.S., however, demand in Canada has been for income-driven products that use bonds and covered call strategies. Indeed, the equity segment (with a big focus on covered call strategies) makes up 47% of the active ETF market, or $1.9 billion in assets. The market for Canadian active ETFs is led by Horizons, followed by BMO, BlackRock, PowerShares and First Asset. In contrast to the U.S., fixed income products rank a distant second on the active ETF list, at 26% (or $1 billion in assets). Multi-asset strategies are a close third, with 25% market share (or just under $1 billion) and $84 million (or 2%) in commodity covered call funds.

It’s an interesting study in contrasts and points to potential differences in retail and institutional use of active ETF products in both the U.S. and Canada.

What about you—do you use active ETFs in your portfolio. If so, how?

Caroline Cakebread is editor of Canadian Investment Review and based in Toronto.
© Copyright 2014 Rogers Publishing Ltd. Originally published on benefitscanada.com

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