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Your step-by-step guide to active ETF due diligence
15 steps every investor needs to consider when doing their due diligence on active ETFs.
The ETF Lab
ETF Spotlight: Three pockets of value in fixed income for 2024
In the latest episode from the Mackenzie Investments Podcast, Konstantin Boehmer, Co-Lead of Mackenzie’s Fixed Income team, along with host Matthew Schnurr, review fixed income markets in 2024. Konstantin also goes over surprises from the past year and highlights his three most high conviction fixed income ideas as we approach 2024.
Below, we highlight some key takeaways from this conversation and add our own ETF perspective.
2023 fixed income market review
Up until a month ago, fixed income asset classes were generally flat to negative with a few pockets of outperformance. However, a repricing of rate expectations and some softer economic data led to a strong month of returns for fixed income, greatly boosting YTD returns.
Source: Mackenzie Investments, as of December 4, 2023
Biggest surprise of 2023
The biggest surprise of 2023, on the fixed income side, is floating rate loans. Coming into the year, many assumed that the prior year of accelerated rate hikes would begin to put significant pressure on issuers and particularly as the economy slowed. Instead, a nearly double-digit coupon rate was paired with some price appreciation amounting to a YTD return of over 10%, contrasting with the more muted returns in broad market fixed income.
Shown below are the YTD returns for MFT – (Mackenzie Floating Rate Income ETF) and the QUB – (Mackenzie US Aggregate Bond Index ETF (CAD-H)).
Source: Morningstar Direct, as of December 1, 2023
Three pockets of value for 2024
During the podcast, Konstantin mentioned three asset classes in which he and his team continue to see value. Below, we list each idea and several ETFs relevant to each of these asset classes:
1) Short term fixed income
Short term bond yields remain attractive, as government yield curves remain inverted – with short term rates higher than long term yields.
Source: Bloomberg; as of December 5, 2023
Mackenzie Investments offers both an index ETF (QSB) and an actively managed ETF (MCSB) in this space. The duration for these ETFs range from around 2 to 2.5 years, while the yield-to-maturity is over 5%.1
Mackenzie also recently launch an ultra short duration bond ETF (QASH), which has a duration of 0.47 years, a yield-to-maturity of 5.55% and invests in a mix of corporate and government securities.
Source: Mackenzie Investments, Bloomberg; as of December 4, 2023
For more on QASH – (Mackenzie Canadian Ultra Short Bond Index ETF), see our feature page or our prior ETF Lab: Exploring a low-risk alternative to cash, GICs and HISA ETFs.
2) EM local currency bonds
EM central banks were well ahead of DM central banks in aggressively hiking rates to bring down inflation. Higher real yields, falling inflation and appreciating currencies across several EM countries (particularly Mexico and Brazil) have led EM local currency debt to be amongst the top performing asset classes in 2023.
Source: Bloomberg; as of December 4, 2023; using the latest available data
Investors looking for index exposure to EM bonds can consider the two EM debt ETFs below:
Source: Mackenzie Investments; annualized performance as of October 31, 2023
3) US Treasury Inflation-Protected Securities (TIPS)
QTIP – (Mackenzie US TIPS Index ETF (CAD-Hedged)), which tracks a diversified portfolio of US TIPS, has a real yield of 2.34%2, after stripping out the effects of inflation. With a duration of 5.57 years, QTIP can also help increase the weighted average duration of one’s fixed income portfolio, while helping buffer against future upside surprises in inflation.
Our view is that advisors can consider a strategic allocation to QTIP in their client’s portfolios for the following reasons:
- Positive real yields: QTIP has a real yield 2.34%3, after stripping out the effects of inflation.
- Risk of stickier inflation: Several factors like stickier jobs/services data, deglobalization risks, aging populations, and the transition to a lower carbon world all could keep inflation higher than current market expectations.
- Equity risk diversification
- Made for Canadians, by Canadians: QTIP is 100% hedged back to CAD and is domiciled in Canada, and thus potentially can achieve a better tax outcome on distributions versus investing in US-listed ETFs.
ETF News & Notes
Tax loss selling deadline – Be sure to trade prior to December 27th
If you’re planning on selling an investment at a loss to offset it against capital gains, for this year or in the last three years, you need to do it in 2023. You will typically need two business days for the transaction to settle, so be sure to trade your stocks/ETFs/mutual funds by December 27, 2023. Refer to our piece 2023 Year-end tax strategies that you need to know for more details.
And for more on how to implement a tax loss harvesting strategy and opportunities in 2023, see our resources below:
Source: Mackenzie Investments.
OSC issues a warning to Canadian ETF issuers over misleading yields
In a notice to the industry, the OSC warned that some issuers have been “hyping” their funds’ yield numbers and have tried to attract investors solely on “yield” over other relevant aspects of the fund.
The OSC also stated that issuers should be careful when using “yield” to refer to distribution rates from the ETF, which may include return of capital (ROC).
Your step-by-step guide to active ETF due diligence
In our latest article, Prerna Mathews, Vice President, ETF Product Strategy delves into the due diligence process for effectively evaluating actively managed ETFs. One interesting consideration is evaluating the structure of the ETF and its impact on total cost of ownership. More specifically, Prerna notes that advisors should consider whether the ETF is a stand-alone trust or is part of a mutual fund series (what is referred to as an ETF series).
“Within an ETF series, costs are mutualized across all investors (similar to a mutual fund structure), however investors of ETF series would still have to pay spread and commission costs when entering/leaving the ETF. Within a stand-alone ETF, costs are typically not mutualized as investors pay their trading costs when buying or selling units of the ETF”.
ETF Flows Update
- Its been another strong year for the Canadian ETF market, with over $34 billion in net inflows in the first 11 months of 2023.4
- As equities rallied throughout November, inflows picked up for these ETFs – gathering $2.6 billion in inflows in November alone. Index based equity ETFs made up $2.3 billion of that total.5
- With speculation abound that the SEC may approve a spot bitcoin ETF in the US, crypto prices have rallied significantly and crypto tracking ETFs here in Canada have gathered outsized flows in recent weeks.
This Week’s Read
Mackenzie ETF Top Performers
Source:
1: Mackenzie Investments; As of October 31, 2023
2: Bloomberg; as of December 4, 2023
3: Bloomberg; as of December 4, 2023
4: Bloomberg, Mackenzie Investments
5: TD ETF Weekly; December 5, 2023
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