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ROB CARRICK

Friday, January 26, 2018

An endorsement of active management has come from a most unlikely source.

Just over 40 per cent of money flowing into bond exchange-traded funds last year went to actively managed funds rather than those tracking bond indexes. The Canadian market for ETFs has for years offered active-management options, but the most attractive funds are without a doubt the megacheap ones that track mainstream stock and bond indexes. In fact, the two most popular bond funds in 2017 were index trackers - the BMO Aggregate Bond Index ETF (ZAG-T) and the BMO High Yield U.S. Corporate Bond Index ETF (ZJK-T). Over all, 81 per cent of bond ETF assets were in index-tracking funds at the end of 2017.

And yet, significant inflows were reported for several actively managed bond ETFs last year. "The increasing popularity of this category speaks to the conviction shared by Canadian investors that there might be a place for active management among opaque and difficult-to-access asset classes," National Bank Financial analysts wrote in a summary of ETF trading in 2017.

My theory on why this is happening: Investors are hoping active management will blunt the negative effect on bonds from rising interest rates. A bond ETF run by a portfolio manager could, for example, move to short-term bonds or navigate assets from government into corporate debt. Some highyield bonds could be worked in to boost overall returns.

It's worth noting that a supposed advantage of holding actively managed equity funds is their ability to outperform indexes in down markets. However, long-term results tend to give an advantage to the index over active management.

The five actively managed bond ETFs that drew the most investor interest last year are: RBC Canadian Preferred Share ETF (RPF-T), which focuses on rate-reset preferred shares and has a management expense ratio of 0.59 per cent; Horizons Active Preferred Share ETF (HPR-T), a well-established fund - it began trading in 2010 - that has an MER of 0.64 per cent; Dynamic iShares Active Preferred Shares ETF (DXP-T), a year-old iShares offering with an MER that should come in around 0.6 per cent; First Asset Investment Grade Bond ETF (FIG-T), another long timer - this one with an inception date in 2009 and whose MER is 0.82 per cent; Pimco Monthly Income Fund (PMIF-T), a new global bond offering with an MER that should come in around 0.77 per cent.

ZAG's MER, by the way, is 0.14 per cent. In a world where interest rates remain low by historical standards (even as they edge higher), a low fee is a big asset.

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