Horizons ETFs Management, a subsidiary of Mirae Asset Global Investments, which the Korean firm acquired in 2011, is the second largest player in Canada’s active ETF space. It has around $3.3bn in assets in such products, and a 20% market share, according to the ranking by The Globe and Mail. BMO Asset Management is the largest asset manager in the space, with $6.3bn in assets.
The Canadian active ETF market is second only to the US in the number of products and their size. In January, there were 148 active ETFs listed in Canada, with $17bn in assets, or 22% of the world’s market.
Despite that, even in Canada, the level of understanding of active ETFs is low, Hawkins told FSA. “I can still go into meetings with some asset management companies and they will say that an ETF can only provide passive beta rather than an element of discretionary asset management or active strategy,” he said.
Horizons ETFs sells active and passive ETFs in Canada.
An exchange-traded fund (ETF) as an investment vehicle can support a range of strategies, from passive to fully active, akin to a traditional mutual fund. The difference between an active ETF and an active mutual fund lies only in the way the two investments are distributed. A mutual fund has daily liquidity and is only bought from and sold to its issuer. An ETF supports intraday liquidity and pricing, and can be traded on a secondary market, through a stock-exchange listing.
Even though management fees for active ETFs and mutual funds are likely to be similar, there’s a significant difference in trading costs. Since an ETF trades on a stock exchange, one can buy it through a broker, who usually charges a trading commission that is much lower than the customary 1% up-front fee banks charge when selling traditional mutual funds.
In addition, active ETFs provide intraday liquidity, allowing for more flexibility and price transparency. Moreover, exchanges have created derivative products (options) on some more popular ETFs, which provides even more flexibility in terms of possible strategies and risk management.
As investors demand more flexibility, intraday liquidity and lower cost of entry for all their investments, active fund managers will be increasingly open to offering their strategies in the ETF form, Hawkins believes.
“Strategies offered in active ETFs are generally identical to those of a mutual fund,” Hawkins said. “Some of our fixed income strategies are available both in a mutual fund wrapper and an ETF wrapper, they are managed by the same active manager.”
Ultimately, ETFs, whether passive or active, are the way of the future, Hawkins believes. “Active ETFs have a place in the overall investment schemes of investors more so than mutual funds,” he said. “Mutual funds are dinosaurs, they are going to die out, albeit at a glacier’s pace,” he added.
Transparency
Hong Kong SFC launched a consultation process on active ETFs in December 2017. The main point of the consultation is the determination of transparency requirements, the decision that may foster or stifle development of such products.
Canadian regulators have adopted a progressive stance aimed to dispel concerns of active managers having to disclose their holdings daily, thereby giving up their “secret sauce”.
In Canada, active mutual funds and ETFs are covered by the same regulation. They are required to disclose the top 25% of their holdings on a quarterly basis, and the full portfolio twice a year within 60 days of the end of the period, Hawkins explained.
In the meantime, they provide daily disclosure only to market makers and authorised participants (entities that create and redeem ETF units as needed) for the purpose of maintaining an efficient market.
Although Horizons ETFs have 14 products listed in Hong Kong, the firm is not planning to launch active ETFs here, Hawkins said. Mirae Asset’s domestic Korean division Tiger ETFs is looking at launching transparent active ETFs in Korea, he added.
