What are we looking for
Top-performing active ETFs that have made it past a preschooler’s age
The screen
From the humble beginnings of the Toronto Index Participation Shares (now XIU-T) in 1990, today’s investor can choose from a whopping 1,672 Canadian-listed ETFs. Of late, the industry has seen a boom of active ETFs – those that do not strictly follow an index but rather have a portfolio manager making buying and selling decisions. Until recently that feature was largely reserved for those who invested in mutual funds.
But like mutual funds, ETFs can also close unexpectedly, triggering an unwanted tax consequence, particularly when they are held outside of a tax shelter. Interestingly, in my colleagues’ latest research report, it was found that active ETFs in Canada have a history of closing shop (i.e. liquidating and returning funds to investors) much earlier in their lives when compared with mutual funds. Over the past decade, the average age of a liquidated active ETF was 3.6 years, almost half that of mutual funds that were liquidated over the same 10-year period. While fund windups have sometimes been the result of financial shenanigans, more often they are a function of asset size (how much money the fund is managing) and performance.
With this in mind, today we use Morningstar Direct to screen for top-performing active ETFs that have reached the ripe old age of five years, with the idea being that they have reasonable performance and have survived long enough to gather a reasonable amount of assets to support their continued operations. Specifically, I screened the universe of Canadian-listed ETFs for those that:
- Have an inception date prior to May 28, 2020.
- Have received a Morningstar Ratings for Funds of five stars, signifying that they have historically outperformed their category peers (which include both mutual funds and ETFs) on a risk-adjusted basis after accounting for fees.
- Morningstar believes will outperform their peers in the future, denoted by a Morningstar Medalist Rating of gold, silver, or bronze. This rating is arrived upon by Morningstar’s qualitative analysis of people (the experience and prior record of the management team), parent (the stewardship qualities of the firm, penalizing firms that liquidate funds often) and process (the robustness and consistency of the decision-making process and risk mitigation techniques).
I excluded sector-specific ETFs, such as those that invest in only health care companies, for example.
What we found
The ETFs that qualified for today’s screen are listed in the table accompanying this article. The table includes tickers, management expense ratios, asset class, category, ratings and returns. Readers are urged to first look at the asset class and category to which each ETF belongs, given that the ratings are relative to peers in these respective categories.
This article does not constitute financial advice. Investors are encouraged to conduct their own analysis before buying or selling any of the investments listed here.
Ian Tam, CFA, is director of investment research for Morningstar Canada.