Thematic, socially responsible ETFs to grow in 2019

Ruth Saldanha: With ETFs almost doubling net sales as compared to mutual funds, we seem to be entering the new age of ETFs. Mark Noble, Senior Vice President of ETFs Strategy at Horizons ETF is here with us today to discuss his future outlook. Mark, thank you so much for joining us today.

Mark Noble : Great to be here.

Saldanha : So, what do you expect from 2019? When we were talking earlier, you spoke about how you expect new innovative products and certain pockets. What are these pockets?

Noble : Well, I think, what you start to see is, I like to say the ETF business is all like the real estate business. So, market cap indices are sort of your beachfront property and there's probably not a lot of room to grow and trying to capture the S&P 500 or the S&P/TSX 60. In fact, my view is that that kind of market exposure is going to zero, like we are going to see zero management fee with ETFs. We are already starting to see them coming to market and they will be on those big indices.

So, where are people going to find success in growing new product? It's going to be in two key areas. I'd like to say thematic ETFs and then a subset of thematic ETFs which would be ETFs that are aligned with social values or social justice issues. So, I think those are the two areas where you will start to see a lot more products coming to market. Certainly, in the U.S. and even in Canada, we've seen a lot of success with some thematic sectors, so robotics, marijuana, emerging technology. Now, these types of ETFs don't usually fall under a very easy to make bucket where I can just have an index and hold them. It takes a lot more work to identify the stocks because they are global, they are dispersed. But people want to capture some of these mega themes or mega trends. So, I think you will start to see more sectors there.

And technology is always somewhere to always look at. As new technology comes to the forefront, let's think of even things that are sort of we wouldn't even concept a couple of years ago such as augmented reality and virtual reality, there could be ETFs that go down that line and try to capture that type of industry. But the really other big growth there I think we're going to see is in what I call progressive values or socially responsible investing.

One thing that we are seeing with investors, particularly younger investors, so I'm going to say investors sort of 40 and younger and female investors who are – increasingly, they are much more important demographic of investors is, there is a view that they want to empower their money. So, when they invest in something, they want it to be in line with things that they feel good about investing in. So, there's a movement of foot and we see it in more and more studies amongst retail investors that they are not so much interested in returns. Of course, they are, but they are willing to give up a little bit of the returns if it also aligns with their value. So, I think you will start to see a lot more socially responsible investment funds come to the forefront, a lot more thematic plays on key social demographics as we see women's equality I think has already coming into the forefront. It could all be a matter of time probably before we see LGBTQ type of ETF, maybe social justice issues, sustainable environmental issues. This is something that I think is coming to the forefront. We see it in consumers, we see consumers opting for ethical shampoos, things like that. Well, of course, that's going to find its way into ETF investing.

Saldanha : In terms of traditional buckets, like equities and fixed income, where do you see the most flows coming in for 2019 and why?

Noble : Well, I think, fixed income continues to be a key driver of asset growth and there's a number of reasons why. Number one, there's already a lot of money invested in fixed income in Canada, particularly in the fixed income ETFs. ETFs don't trade over-the-counter like traditional fixed income. So, they tend to provide cost, liquidity and transparency benefits in investing in fixed income. So, 30% of our market in Canada is fixed income. What you are going to see is likely a continuance of money going into fixed income because even if, you know, we can make the case right now that equity market is oversold and maybe it's an interesting time to get in, I think psychologically Canadian investors are already heavily pegged towards being defensive. And the primary risk of being invested in fixed income last year was interest rates. And even if we see, let's say, two more interest rate rises, which is a fairly bullish prognosis at this point in time, a lot of that's already baked in on the yield. So, your downside risk in fixed income isn't quite what it was last year. Though those factors combined make me think that fixed income becomes a key driver of growth. And I think products and asset flows will both move towards the broad investment-grade fixed income in 2019.

Saldanha : Thank you so much for joining us today, Mark.

Noble : My pleasure.

Saldanha : For Morningstar, I'm Ruth Saldanha.