By Aditya Nain on October 20, 2023
Estimated reading time: 5 minutes

Taking an active approach to ETF investing in Canada

By Aditya Nain on October 20, 2023
Estimated reading time: 5 minutes

Active ETFs may offer investors a more flexible alternative to mutual funds—and the potential to outperform a benchmark index. Are they right for your RRSP?

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What are active ETFs?

Fund-based investing has two primary management styles: active and passive. In active management, the fund manager proactively decides which stocks or securities to buy, sell or hold based on their view of the market and the economy. In passive management, the fund manager attempts to “track” or replicate an index. Many passively managed exchange-traded funds (ETFs) track well-known stock indexes, such as the S&P 500 or the S&P/TSX 60.

Although ETFs are often considered instruments for passive or index investing, actively managed ETFs are on the rise. If U.S. investment trends are a bellwether for what’s in store for Canada—and they often are—then active ETFs may have a bright future here.

In the U.S., the share of ETF inflows that went to active ETFs in the first half of 2023 was about 30%, more than double the amount for all of 2022. A decade ago, active ETFs accounted for just 2.3% of fund inflows. How does the growth of active ETFs compare to that of passive ETFs? In the first half of 2023, passive ETFs grew at an organic rate of 3%, while active ETFs grew much quicker, at a rate of 14%. They’re gaining popularity in other global markets, as well. In Asia, active ETFs grew 78% in the first half of this year.

Clearly, active ETFs are also attracting a lot of interest from investors. But how do active ETFs work, are they right for you, and how can you buy these ETFs in Canada for your registered retirement savings plan (RRSP)?

The benefits of active ETFs

In the investment world, there’s plenty of debate over which management style—active or passive—is better for investors, but both have their merits. If active ETFs fit your investment objective, time horizon and strategy, they could offer you the following benefits:

Opportunity to invest in specific strategies: Active funds could offer investors a convenient way to invest in a certain sector or implement a particular investment strategy. While this can be achieved with passive ETFs too, the active ETF option could be used by investors who want to try to outperform the index in a particular sector.
Possibility of outperforming the market: Although passive ETFs typically have lower fees than active ones, some investors are unsatisfied with simply getting market exposure; they want to outperform the market, which is primarily what active ETFs try to do.
Easy to buy and sell: ETFs offer greater flexibility of trading intraday than mutual funds. You can buy and sell ETFs on a stock exchange anytime during trading hours. Also, unlike mutual funds, you’ll know the purchase or sale price of the ETF units when you place the order.
Downside protection: Active ETF managers can prepare for or react to market events, including corrections and crashes. Unlike with an index fund, which mimics what the index itself does, the manager of an active ETF may increase their cash or fixed-income holdings in anticipation of a market downturn. In doing so, they attempt to limit their investments’ decline in value.

Because of the above features, active ETFs could be the “core” portion of an investment portfolio (and, if held inside a registered account such as an RRSP, your investments can grow on a tax-deferred basis). Active ETFs could also form part of a “core and explore” portfolio in which passive ETFs could be the core. As the “explore” part of the strategy, active ETFs could be used to explore a particular sector or to attempt to outperform a market index.

How to buy Fidelity Active ETFs

If you decide that active ETFs are suited to your portfolio and investment style, there are two ways to access them.

A financial advisor: Financial advisors can access Fidelity’s ETFs and add them to their clients’ investment portfolios. A financial advisor can help you decide whether active ETFs are a good fit for your portfolio, which one(s) to buy and how much to invest.
An online brokerage: For self-directed investors who don’t work with an advisor, Fidelity’s ETFs are available through most online brokerages (also known as “discount” brokerages). When logged in to your online brokerage account, search for the ticker symbol of the ETF you’re searching for—as you would search for a stock.

In investing, one size doesn’t fit all. While some investors may prefer a passive-only portfolio of ETFs, others may want to implement specific strategies with the potential for higher returns. Also, many investors do both—hold passive ETFs as well as experiment with active options.

Learn more about Fidelity Active ETFs.

This article is sponsored.

This is a paid post that is informative but also may feature a client’s product or service. These posts are written, edited and produced by MoneySense with assigned freelancers and approved by the client.

An important message from Fidelity Investments Canada ULC

Commissions, trailing commissions, management fees, brokerage fees and expenses may be associated with investments in mutual funds and ETFs. Please read the mutual funds or ETF’s prospectus, which contains detailed investment information, before investing. Mutual funds and ETFs are not guaranteed. Their values change frequently, and investors may experience a gain or a loss. Past performance may not be repeated.

The statements contained herein are based on information believed to be reliable and are provided for information purposes only. Where such information is based in whole or in part on information provided by third parties, we cannot guarantee that it is accurate, complete or current at all times. It does not provide investment, tax or legal advice, and is not an offer or solicitation to buy. Graphs and charts are used for illustrative purposes only and do not reflect future values or returns on investment of any fund or portfolio. Particular investment strategies should be evaluated according to an investor’s investment objectives and tolerance for risk. Fidelity Investments Canada ULC and its affiliates and related entities are not liable for any errors or omissions in the information or for any loss or damage suffered.

The presenter is not registered with any securities commission and therefore cannot provide advice regarding securities.

About Aditya Nain

Aditya Nain is an author, speaker and educator who writes about Canadian investments, personal finance and crypto. He has co-authored two books and taught at universities for 12 years.

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