How Canada’s ETF Market Differs From US

April 13, 2018

In Tyler Mordythe lead-up to the first Inside ETFs Canada on June 21-22, at the Fairmont Queen Elizabeth in Montreal, Forstrong President and Chief Investment Officer Tyler Mordy explains why a conference focused on Canada’s ETF-related issues is so important, and why a macro approach is good for Canadian investors. Why is it so important to have an Inside ETFs Canada conference?

Mordy: I've been involved with the Inside ETFs conference in the U.S. and other jurisdictions almost since the inception of the conference. The work that's gone into the buildup of the Canada conference has just been really encouraging to see.

I think the work that Matt [Hougan, chairman of Inside ETFs] and Dave [Nadig, Managing Director of] have done has been just phenomenal. I've called it the Davos of ETFs. It's become the place where thought leadership, debate and just progressing the industry has happened.

It's going to be an opportunity for perhaps Canadians to discuss some of their own issues that are not as relevant to American investors. I'm very happy to be part of it. Would you talk about the panel you’ll be on there?

Mordy: My panel is called "Adapt or Die: Managing a Bond ETF Portfolio in a New Regime," and it's all about income generation.

Obviously, we live in an era of low interest rates, and the defining problem of our time is what we've called a global income crisis.

When you're managing a bond portfolio—or a better phrase, income portfolio—the question you first ask, starting from first principles is, what problem are we actually solving? And the problem we're actually solving is how to generate some decent income without going too far out on the risk curves.

Traditionally, generating income as a conservative investor was quite easy when we had interest rates that were normal and we didn't have to deal with an era of financial repression.

ETFs have “colonized” the world's asset classes. And they've given portfolio managers a wider tool set with which to generate income or growth, or whatever the objective is.

The point of my presentation is that ETFs have facilitated a better income generation approach, in that we can look further afield for yield from all different asset types. Put it together in a diversified portfolio, and you can generate a decent income for clients without having to go further out on the risk curves.

One of the approaches that investors have pursued in recent years, because of low interest rates is, “within my balanced portfolio, I'm not earning any income on the bond component, so I'm going to go all into dividend-paying equities to increase my yield.”

The issue with that is that all of a sudden you've totally changed the nature of your risks, and where's the shock-absorbing component within the balance construct? It's just not there anymore. You're basically all equity risk.

We source income from around the world, and we don't compromise on diversification. The former strategy with the dividend-paying equities is concentrating equity risk. But the latter strategy relies on the only free lunch we have in finance, which is global diversification that generates a decent income without, again, removing that shock-absorbing component of the balance construct. Should Canadian investors be thinking differently than U.S. investors?

Mordy: The main difference for a Canada-domiciled investor is that your domestic investments are very different than your U.S. investments.

For example, in Canada, we have a very concentrated stock market; a lot of the exposures that Canadian investors would have are invested in banks and energy stocks.

Conversely, in the U..S., obviously you've got a much more diversified stock market, and therefore being a domestic investor in the U.S. just gives you automatically broader diversification. If you're in Canada, you're very concentrated in all those risks.

The second consideration is that a Canadian investor happens to have the misfortune of being in a currency block that is incredibly volatile. So any time we invest outside of our borders, we have to be incredibly cognizant of the currency risk we're taking.

But we’re big fans of active currency management. We believe currencies are very similar to any other asset class, like stocks and bonds. They can become overloved and overvalued; conversely, they can become underloved and undervalued.

That presents opportunity to go long in a currency or to just short a currency. Again, all that's facilitated through the ETF vehicle itself.


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