The Fund Library :: Columns :: Getting what you pay for in the ETF spectrum

By Mark Brisley, Managing Director and Head of Dynamic Funds

Low fees may be the first thing that attracts investors to exchange-traded funds (ETFs) of any kind – passive, smart beta, and active – but it may be worth a deeper dive to find out what you’re getting for your money. That’s because each of the three ETF categories takes a slightly different approach when it comes to investing. Yes, all three can be bought and sold throughout the day like stocks, and yes, they’re generally highly liquid, meaning there’s a ready market of buyers if you want to sell. Beyond that there are pros and cons to investing in each, and it’s important to review them with your advisor to determine what’s right for you and what you get for your fee.

Passive ETFs

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 spent.

Active ETFs

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 benchmark.

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.

Investment considerations

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

Important information

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.