Passive ETFs are investment vehicles that track an entire index, such as
the S&P/TSX Composite or S&P 500. If, for instance, you choose to
invest in a passive ETF that tracks the S&P 500, you will be buying the
500 stocks in the index and in the same amounts. By simply tracking the
market and taking a hands-off approach to investment selection – buying the
index – it will be impossible to “beat” the market, which is why this is
the lowest-cost option.
You will also be exposed to the near identical ups and downs of the broader
market as reported in the financial press every day. If the thought of
watching your investments rise and fall in value each day worries you to
the point of abandoning your long-term investment plan, the cost-savings
may not be worth it.
Smart beta ETFs
Unlike passive ETFs that buy and hold an entire index, smart beta ETFs
selectively invest in certain constituents of an index. In addition to
picking and choosing among a basket of stocks, these “factor-based,” or
smart-beta, ETFs also weight each purchased security differently than the
index. In so doing, these ETFs try to temper the volatility of the index.
Smart beta ETF fees are generally higher than those attached to passive
ETFs due to stock selection, which is normally done by computer algorithm.
The key is for investors to find out what “factors” are used to determine
investment selection and whether that makes sense to you for the money
Active ETFs are generally priced higher than either smart beta ETFs or
passive ETFs. That’s because active ETFs rely on professional managers who
utilize analytical research – qualitative and quantitative – to help them
make choices from available investments in order to add value beyond the
Personal and in-depth research is critical when it comes to identifying
companies with the strongest growth prospects, which is how professional
managers can achieve superior performance outcomes. Professional managers
also have the opportunity to hold cash, giving them the flexibility to
reduce exposure to or completely exit markets when things become volatile,
and then potentially buy back in later at lower prices. If careful
portfolio management with a balanced eye for risk management and the
opportunity for outperformance makes sense to you, it may be worth the
slightly higher cost of active ETF investing.
If you’re a self-directed investor, there’s a large universe of ETFs
spanning each category – passive, smart beta and active – at a wide range
of price points. Although there’s no shortage of information to be gleaned
online on each of the investment approaches – prices included – the
challenge may be sorting through it and coming to a determination of what’s
best for you. That’s where a financial advisor may be of help. They take
the time to get to know you and your individual circumstances to build a
well-diversified portfolio of investments based on your risk tolerance,
investment time horizon and financial objectives.
At Dynamic, we have a suite of nine active ETFs that invest in stocks
and/or bonds in Canada, the United States, and globally. Visit www.dynamic.ca to view each offering
or talk to your advisor.
Mark Brisley is Managing Director and Head of
Dynamic Funds, one of Canada’s largest asset management companies. With over 20
years of industry experience, Mark is responsible for the firm’s
strategic execution, day-to-day operations, and business development.
Notes and Disclaimer
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Commissions, trailing commissions, management fees and expenses all may be
associated with mutual fund and exchange traded funds (ETF) investments.
Please read the prospectus before investing. Mutual funds and ETFs are not
guaranteed, their values change frequently and past performance may not be
repeated. Dynamic iShares® Active ETFs are managed by BlackRock Asset
Management Canada Limited and invest in selected mutual funds managed by
1832 Asset Management L.P. Dynamic Funds® is a registered trademark of its
owner, used under license and a division of 1832 Asset Management L.P.
iShares and BlackRock are registered trademarks of BlackRock, Inc., or its
subsidiaries in the United States and elsewhere. Used with permission. The
information provided is not intended to be investment advice for specific
investments advice tailored to their needs.