Actively managed bond ETFs are a must in these uncertain times

22 October 2020 by National Bank Investments

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.¹ 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?

Legal notes

¹Data compiled by National Bank Financial Markets.

The information and opinions herein are provided for information purposes only and are subject to change. The information and the data supplied in the present document, including those supplied by third parties, are considered accurate at the time of their printing and were obtained from sources which we considered reliable. We reserve the right to modify them without advance notice. The opinions are not intended as investment advice nor are they provided to promote any particular investments and should in no way form the basis for your investment decisions. National Bank Investments Inc. has taken the necessary measures to ensure the quality and accuracy of the information contained herein at the time of publication. It does not, however, guarantee that the information is accurate or complete, and this communication creates no legal or contractual obligation on the part of National Bank Investments Inc.

NBI ETFs are offered by National Bank Investments Inc., a wholly owned subsidiary of National Bank of Canada. Management fees, brokerage fees and expenses all may be associated with investments in exchange-traded funds (ETFs). Please read the prospectus or ETF Facts document(s) before investing. ETFs are not guaranteed, their values change frequently and past performance may not be repeated. ETF units are bought and sold at market price on a stock exchange and brokerage commissions will reduce returns. NBI ETFs do not seek to return any predetermined amount at maturity.

® NATIONAL BANK INVESTMENTS is a registered trademark of National Bank of Canada, used under license by National Bank Investments Inc.

National Bank Investments is a member of Canada’s Responsible Investment Association and a signatory of the United Nations-supported Principles for Responsible
Investment.