Would Canadian pension funds use active ETFs?

runnerAt a recent conference on exchange-traded funds (ETFs), I moderated a panel of plan sponsors talking about their ETF use. For the most part, I found that while Canadian pension funds are using ETFs for tactical allocations, they’re not really a big part of the long-term strategic mix. Could this change? Perhaps, but a lot more education and understanding is required around how they can be used. During the discussion, we didn’t even get into active ETF use—the reality is that plan sponsors are still getting used to the passive products.

Which is why this article in Pensions & Investments jumped out at me. It draws on results from a new forecast by McKinsey & Co. that suggests active ETF assets could reach $500 billion by 2020 (compared with just $12.5 billion today).

The question is what role could pension funds have in the growth of the active ETF space? According to the article, two key trends will define the future of these products in the institutional and pension space: reform in the money market space and a recent burst of effort on the part of the U.S. Securities and Exchange Commission to clear the backlog of exemptive relief applications from firms wanting to launch actively managed products. If that trend continues, the active ETF market will not only get bigger, it will also allow providers to get products into the marketplace that could better meet institutional needs. Breaking down the backlog could just breathe new life into active ETFs, which, until now, have been poorly understood in the institutional space.

As for money market reforms in the U.S., McKinsey report author Onur Erzan notes that addressing floating net asset value for money market funds is a major step toward ETF conversion and intraday liquidity, another move that could fuel faster growth in the active ETF space.

For Canadian plan sponsors that claim more education is needed from ETF providers on how to use (or even buy) the product, active ETFs will be an even tougher sell. But given that we have until 2020—the date by which McKinsey says the active ETF market will reach $500 billion—plan sponsors appear to have a few more years to kick the tires.