The Globe and Mail
Investment fund manufacturers have launched 17 systematic exchange-traded funds in Canada so far in 2026, seeking to attract investors with rules-based equity ETFs that come with lower fees than most actively managed funds.
Fees for systematic ETFs average 48 per cent below traditional active ETFs within the same category, according to a July report from Morningstar Canada, “making them cheap and credible rivals to both active and passive managers.”
“It’s the year of the systematic. It really did seem to come out of nowhere,” says Kimberly Hart, director of manager research for Morningstar Canada and author of the report.
“It says to me that [asset] managers see a large, potential addressable market and investor demand. Potentially, this is where active management is moving to now.”
Active systematic ETFs follow a “transparent, repeatable, rules-based investment process with limited portfolio manager discretion,” according to Morningstar’s definition. Unlike discretionary active ETFs, systematic ETFs may use “quantitative models or codified investment rules to drive security selection and portfolio construction.”
The most recent systematic ETFs are built around multifactor models including market weight, growth, value, earnings quality, profitability and management quality. They offer “passive-like efficiency with potential active upside,” the report states.
Fees for these recently launched systematic ETFs are competitive with the low fees of passive index funds and range from about 0.15 per cent to 0.8 per cent.
“It’s a very compelling value proposition if they’re able to deliver,” Ms. Hart says.
Active funds are taking a growing share of ETF assets in Canada and systematic ETFs are contributing to that trend, attracting more than one-fifth of the total $38.8-billion in net inflows into active ETFs in the first five months of this year, according to Morningstar Canada. Active discretionary strategies had $23.9-billion of inflows while active systematic brought in $8.1-billion.
Active systematic ETFs are still a small part of the overall ETF market, making up 4.2 per cent of assets under management.
Second wave
This is the second wave of systematic ETFs to hit the market, Ms. Hart says. The first wave, in the 2010s, consisted of mostly single-factor strategies, including low-volatility or dividend ETFs.
The Morningstar report says that many of those ETFs were consolidated or closed in the early 2020s.
BMO Low Volatility Canadian Equity ETF ZLB-T, launched in 2011, is the largest systematic ETF in Canada with $6.3-billion in AUM, followed by TD Q Canadian Dividend ETF TQCD-T, launched in 2019, with $3.4-billion in AUM.
The 17 new systematic ETFs launched this year came from four firms: Avantis Investors and CIBC Asset Management Inc., BMO Global Asset Management Inc., Russell Investments Canada Ltd. and Mackenzie Investments.
Many investors have looked at the market and felt they had to choose either a passive fund with low fees or an active fund with higher fees and the potential for better performance, says Phil McInnis, chief investment strategist with Los Angeles-based Avantis Investors, which partnered with CIBC AM to launch eight systematic ETFs in Canada earlier this year.
“We’re trying to be better than just the market returns, but we’re trying to do it in a way that’s very transparent and very consistent,” Mr. McInnis says, with portfolio managers using computerized tools to evaluate thousands of data points for global stocks daily.
The aim is also to keep fees low, knowing that both advisors and investors are more cognizant about the impact of fees on long-term returns, he says, something he’s heard as he’s travelled the country meeting with advisors.
Since the Avantis CIBC AM systematic ETFs launched in February and March, they’ve pulled in about $1.5-billion in AUM, Mr. McInnis says.
Adjusting for CIBC AM asset-allocation ETFs that hold Avantis CIBC ETFs, that figure is closer to $932-million, according to data from Morningstar Canada, which is a “strong” showing, Ms. Hart says.
Different paths to diversification
The growth of large-cap U.S. tech stocks has increased their weighting in indexes such as the S&P 500 dramatically, skewing the performance of passive ETFs toward the performance of big names such as Nvidia Corp., Apple Inc. and Alphabet Inc. and making it more difficult for active managers to outperform, Ms. Hart says.
“Passive used to be a euphemism for diversified broad market exposure, but it’s not necessarily anymore,” she says.
Morningstar data show systematic ETFs are well diversified and, on average, hold more than 257 stocks, while passive ETFs average 209 stocks and active discretionary funds average 73, Ms. Hart says.
Bipan Rai, head of ETF and alternative strategy at BMO GAM, says the firm’s Market+ slate of systematic ETFs, launched in March, aims to address issues such as rebalancing.
When stock prices increase, the funds “go through systematic checks in terms of valuation, quality [and] earnings, and then we make a decision on whether or not to rebalance the weight,” he says. “This is done via a systematic process; we take the emotion out of it. We’ve noticed that this is something the market has been very keen on.”
Investors are also seeking exposure to stocks outside the expensive U.S. market and four of the six BMO Market+ ETFs focus on global equities, Mr. Rai notes. “This is not just a satellite position of a portfolio. This is something that could really be looked at from the prism of a core allocation.”