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The popularity of exchange-traded funds that use active management strategies are on the rise in Canada, and there's a new ETF provider vying for those investment dollars.
Assets in Canadian-listed ETFs stood at $83.6-billion as of Sept. 30, 2015, compared with $73.2-billion a year earlier, with actively managed ETFs now representing 11 per cent of assets, according to research conducted by Investor Economics. Fourteen of the 21 new ETFs launched in the third quarter of this year use active management.
ETFs have traditionally mimicked the investment returns of a certain index, instead of using portfolio managers, allowing for much lower fees than mutual funds. Lysander Funds, a retail affiliate of Canso Investment Counsel, became the 12th player to enter the Canadian ETF market by offering an actively managed fund to tap the preferred shares market.
"Our decision to enter the ETF space was an opportunistic decision and the ETF product was certainly one of the best paths to provide a preferred share offering to the retail market," said Raj Vijh, chief operating officer and chief financial officer with Lysander Funds.
Lysander's original focus was to provide retail distribution and administration for Canso's pooled funds through full-service investment adviser channels. Its product offering was extended to closed-end funds traded on the TSX in 2010 and retail mutual funds in 2011.
The firm launched the Lysander-Slater Preferred Share ActivETF in August and provides exposure to preferred shares of domestic companies listed on a Canadian stock exchange. The management fee for the ETF is 0.65 per cent and it is managed by Jomisc Investments Inc.
It turned out to be an ill-timed launch due to a pullback in the value of rate-reset securities within the preferred shares market. Rate-reset preferreds are popular with investors who are looking for protection from rising interest rates. However, they have performed poorly in recent months. Rate-reset preferreds pay a set dividend for an initial period, usually five years, after which the dividend is reset for another five years based on a spread over the five-year government of Canada bond yield. With bond yields plunging to historic lows, many preferred dividends have been resetting at sharply lower levels.
Howard Atkinson, president of Horizons ETFs Management (Canada) Inc., which offers a competing preferred shares product, suggests the recent poor performance shouldn't deter investors from the market segment.
"Now is a great time for investors to add to their preferred position," Mr. Atkinson says. "We see a lot of value in the preferred market right now – especially for those investors who can take advantage of the dividend tax credits." Horizons has approximately $2.4-billion of assets under management in its actively traded funds, including the Horizons Active Preferred Share ETF.