What are we looking for?
Newer Canadian-listed ETFs worth a peek
The screen
According to Morningstar’s latest data, 287 unique investment funds were launched in Canada this year. A whopping 137 of them were launched as exchange traded funds (ETFs). This is a continuation of trend that spans the last decade. Not only are ETFs increasingly becoming the preferred wrapper, but a growing number of them are also actively managed. In fact, by count, over half the 1500+ ETFs listed in Canada are actively managed. Though assets sitting in these active ETFs haven’t quite caught up to those that are invested passively, active ETFs offer a formidable alternative to the traditional mutual fund structure given they come without embedded advice costs, granting investors who choose to forgo a relationship with an advisor access to professional money managers.
This said, newer products are understandably difficult to analyze. Morningstar’s own “star rating” requires at least a three-year track record. To this end, today I use Morningstar Direct to screen across ETFs launched over the last year that might prompt interest. To derive this list, I used a combination of three filters:
- The Morningstar Medalist Rating – which is Morningstar’s qualitative assessment of whether a fund can outperform its peers in the future via our assessment of parent (the stewardship qualities of the firm), process (the validity and robustness of the investment process and risk mitigation techniques) and people (the experience and tenure of the portfolio management team). For passive strategies, less emphasis is put on the people and parent pillars of the analysis and more is put on the process pillar. The rating does not require a deep returns history.
- The Percentile Rank of the Fund over the Trailing three and six months. Each fund is ranked against its own peer group defined by the Morningstar category based on after-fee total returns.
I would argue heavily that three or six months is nowhere near enough history to judge a fund’s ability to perform, but given these are very new products, an objective look at recent performance is nevertheless worth some consideration. To make today’s screen, these new ETFs were either rated Gold, Silver or Bronze, and rank in the top quartile (top 25 per cent of funds) in the trailing three- and six-month windows.
What we found
The funds that met the above requirements are listed in the table accompanying this article inclusive of their MERs, Ratings where available, inception dates, trailing performance, and importantly which category the funds belong to and whether they are actively managed. The table is sorted first by medalist rating, then by three- and six-month percentile rankings. I also note a number of these funds track a “theme” (for example, artificial intelligence). Though interesting, Morningstar’s research shows that over the last 15 years, globally roughly 80 per cent of thematic funds end up being liquidated with less than half of those remaining having outperformed a plain vanilla equity index. As such, investors are cautioned on over-allocating to said thematic investments.
This article does not constitute financial advice, it is always recommended to conduct one’s own independent research before buying or selling any of the funds mentioned in this article.
Ian Tam, CFA, is director of investment research for Morningstar Canada.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.