Head of ETFs at MacKenzie Investments believes greater efficiency and precision will lead to further reduced fees
The “virtuous cycle” of the Canadian ETF industry means it’s poised to grow in step with greater efficiency and reduced costs, according to a leading industry manager.
Michael Cooke, head of ETFs at MacKenzie Investments, told WP the network effect of the relatively young ETF space means that as the number of buyers and sellers increase, so does its appeal to investors.
He added that large investors are, therefore, likely to be encouraged by growing AUM, trading volume, fee competitiveness and tracking error tightness. He said: “It’s like rings on a tree trunk; it grows every year and as you get new investors, both institutional and retail, expanding their participation in the ETF market, it becomes a virtuous cycle.”
With more and more investors entering the ETF marketplace, the precision is being honed, liquidity increased and, in many cases, prices reduced. Cooke said this is particularly relevant in traditionally hard-to-access asset classes like emerging market data or floating rate loans. “The utility for all investors is only enhanced,” he added.
Are ETFs ready for the next crisis?
Critics regularly bash index-tracking and passive funds as being a disaster waiting to happen. Cooke believes that view is overplayed, although he recognized that ETFs are at the mercy of market structural forces like any other investment vehicle.
However, he is staunch in his view that ETFs are battle-tested and up to the pressures of a severe market dislocation. The Financial Crisis of 2008, for example, proved that many funds were able to offer price discovery and orderly two-way trades throughout the carnage.
He said: “Prices were reflective of the dislocation in the market, but at least there was a bid or an offer to allow investors to give them liquidity in a fashion that many aspects of the cash markets did not provide.
“The ETF industry came through 2008 with flying colours and that was reflected in very strong net inflows into the global ETF market that year.
“There has been a lot of headline attention about the dislocation or disruption that index investment and passive investment might be thrusting upon the investment management industry. Is it eroding price discovery? Is it reducing the efficiency of capital markets? I don't think it is, and I think the representation of ETF and index investment is a little bit overstated.”
Regardless, added Cooke, a good active manager should be able to exploit inefficiencies, so it should play to their strengths. December’s volatility coincided with one of the best months on record for the Canadian ETF industry 2018 as investors arguably started testing out ETFs in place of other types of investment vehicles.
Of course, exchange-traded funds are not a silver bullet but Cooke believes there is now ample evidence of their resilience, integrity and structural soundness through both good markets and bad.
ETFs versus mutual funds
As a champion of the space, he is always likely to throw his weight behind the investment vehicle but that doesn’t mean he is also about to throw mutual funds under the bus. The head-to-head narrative sometimes reads like a death knell for the well-established mutual fund business.
Cooke told WP that ETFs’ big brother remains in good health and that good managers with a strong value proposition, competitive fees and a long-term track record, have nothing to worry about.
He said: “The mutual fund industry is a little bit more mature than the ETF industry and, as such, is just prone to a little bit more turnover. I think that distorts the headline flow data. But I would say the mutual fund industry in general is still in very good shape.”
He added that the ETF market will continue to grow and because of its ability to cater to different investor segments, whether institutional, advice retail, or the DIY channel, it's able to co-mingle assets across different distribution channels in a fashion that other investment products don't necessarily do.
“For the institution, they might be using exchange traded funds instead of futures or direct investment in stocks and bonds or swaps or other ways they historically may have achieved exposures.
“That’s another important driver. It's not just that ETFs growth comes at the expense of the mutual fund industry, it's just taking its rightful place alongside the many other alternatives that institutional and retail investors have. And because it's a relatively nascent industry compared to the mutual fund industry, it tends to have higher net flows and lower redemption rates visa-a-vie a more mature market like the mutual fund industry.”
