5 things I learned at the 2015 ETF Summit

Top ways Canadian institutions are using ETFs.

March 11, 2015

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chess piecesLast week, Canadian Investment Review held its fourth annual ETF Summit. Here are five things I learned about exchange-traded fund (ETF) use in Canada:

The U.S. and Canada have traded places – The summit kicked off with a global economic overview by Scotiabank chief economist Warren Jestin. In his view, it started with cars—auto sales south of the border have hit levels not seen since the start of the millennium as the industry responds to years of pent-up depend. But that’s just part of the story—the bigger trend is job quality. The U.S. is churning out high-quality, high-paying jobs as unemployment falls back below the Canadian rate. That contrasts with Canada which is now creating low paying jobs and losing the quality ones. Don’t lose all hope, however. Jestin says Canadian economic fundamentals are better than anywhere else in the world. So perhaps we will once again have our moment in the economic sun.

2. Challenges in the bond market set to drive more ETF adoption – As banks shed bond inventory in response to post-2008 regulatory developments, investors are hunting elsewhere for sources of fixed income. All this has created tough trading conditions, according to Greg Walker, managing director and head of iShares business development with BlackRock. Some of the main challenges he pointed to are reduced liquidity, widening bid-ask spreads and new issues that are oversubscribed. Such challenges are pushing institutional investors further afield as they shift their attention to ETFs as a simpler and more liquid alternative. As regulatory pressures continue to hamper the bond market, this trend is likely to accelerate.

3. ETFs and climate change – Carbon emission reduction is one of the many ways investors are using ETFs, according to Robert C. Trumbull, head of asset owner ETF sales with  State Street Global Advisors. As he noted, allocating to a low-carbon global equity ETF based on the MSCI ACWI Low Carbon Target Index leads to an 81% reduction in current carbon emissions and a 97% less potential carbon emissions from fossil fuel reserves. An index of this nature, said Trumbull, is an effective way to combine global equity exposure while addressing environmental, social and corporate governance-related issues.

4. Niches not just liquidity – Institutions are turning to ETFs for exposure to niche opportunities in the market, according to Michael Greenberg, vice-president and portfolio manager with Franklin Templeton Solutions. And while he says his fund began using ETFs for liquidity originally, they are now using them to access “more nuanced markets where we didn’t have an active manager—for example, physical gold.”

5. It won’t replace active…it will blend – Our panel discussion also offered perspectives on blurring lines between passive ETF use and active management. “It’s not so polarized,” noted Kevin Rusli, a partner with Blake, Cassels & Graydon. Turnbull also noted that the industry is embracing both beta and passive tools in an active way and that active managers are contributing the growth in the ETF space: “The use of passive instruments by an active manner is converging and will have an impact on the industry in the next 10 years.” Walker agreed that strategies will blend both active and passive but that active managers will always play a role. “But true active is still out there,” he said.

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