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Traditionally, investors and securities advisors alike have almost by default associated exchange-traded funds (ETFs) with passive management, and this holds all the more true for bond ETFs. While it is true that for several years almost all of the bond ETFs available in Canada were passively managed, there has been a shift in recent years towards actively managed bond ETFs.
As of July 31, 2020, 33% of the assets invested in bond ETFs in Canada, or more than $27 billion, was invested in actively managed bond ETFs.* Overall, while ETFs in Canada have continued to grow in popularity in recent years, it is undoubtedly actively managed bond ETFs that have experienced the most sustained growth.
In a time where markets are increasingly volatile due to the pandemic, the expertise of an actively managed bond ETF manager may well add value to your portfolio.
Credit analysis and risk management
Unlike passively managed ETFs, where the portfolio manager implements a strategy to replicate benchmark returns as closely as possible, actively managed ETFs allow the portfolio manager to leverage their expertise to maximize fund returns, particularly in a context where interest rates are historically low, and to ensure capital is preserved when markets are more volatile. This is called “generating alpha.”
As a result, actively managed bond ETF managers can take advantage of certain emerging trends and identify investment opportunities that are not necessarily included in the benchmark of a passively managed bond ETF. This is particularly the case in the corporate bond sector where rate spreads are high: This suggests that value opportunities may emerge. An actively managed bond ETF manager will have free rein to take advantage of such opportunities.
Portfolio diversification
Due in part to the lack of transparency in bond markets, bond trading remains a tedious and complex task for many investors. Actively managed bond ETFs are no doubt an attractive way to diversify your portfolio. Again, the expertise of a portfolio manager and their investment team can be leveraged to conduct more detailed analysis and research and access important credit risk information, ultimately making more informed investment decisions possible.
ESG considerations
The incorporation of ESG (environment, social and governance) factors into investments has been gaining popularity for several years now. These considerations are an integral part of the investment strategy of more and more actively managed bond ETF managers. On the other hand, many major indexes still place very little importance on ESG considerations in their weightings. Whether it is in the fight against social inequalities or climate change, we collectively have the means to do more. Adopting a responsible investment approach is an excellent way to do something for the common good.
Several actively managed bond ETFs on the market offer all of these benefits. Why not take advantage of them?
Annamaria Testani, CFA, is Vice President, National Sales, National Bank Canada. This article previously appeared in the Fall 2020 issue of Your Guide to ETF Investing, published by BrightsRoberts Inc. Used with permission.
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