On the Money with Dynamic Funds

PARTICIPANTS

Peter Tomiuk
Vice President of ETF Distribution, Dynamic Funds

Alan Green
Vice President and Head of ETFs, Dynamic Funds

Mark Brisley: You're listening to the ETF Exchange, presented by On the Money with Dynamic Funds. Join us as we dive into the latest trends and investment strategies to help you navigate the ever-evolving landscape of ETFs.

Alan Green: Welcome to ETF Exchange, presented by On The Money with Dynamic Funds. This series will explore the world of exchange-traded funds, where we break down complex financial concepts into easy-to-understand discussions. Join us as we dive into the latest trends, investment strategies, and expert interviews to help you navigate the ever-evolving landscape of ETFs. Whether you're a seasoned investor or just getting started, our goal is to provide valuable insights to help you make informed decisions and grow your wealth. Subscribe now for a deep dive into the exciting world of ETFs.

My name is Alan Green, and I head up the ETF business for Dynamic. I'm your co-host of the ETF Exchange podcast. I've spent my entire 19-year career in and around the ETF industry. I started my career when these funny things called ETFs were just getting going. It's been a real pleasure to have been in the industry, which has experienced such explosive growth over those years.

Peter Tomiuk: Hello, everyone. My name is Peter Tomiuk, and I head up Dynamic Active ETFs distribution efforts. I've been in the financial services industry for 23 years now, the last half of that solely working with ETFs. I share Alan's enthusiasm for both ETFs and also being alongside as a co-host for this brand new podcast. The goal of the ETF Exchange podcast is to discuss anything and everything regarding ETFs. That can range from the basics, the trends, innovation, compelling ideas, you name it.

Our hope is that you can use this as a one-stop shop resource to be informed and up-to-date on all things ETFs. We're also hoping to provide you a little entertainment along the way, whether that is through healthy debate or entertaining banter, the sky is the limit in what we want to provide you. Before we reach the skies, today, we would like to talk about the ground floor basics like what are ETFs and how have they evolved over the years?

Alan, I need to ask you a really important question here. What are these mysterious things we call ETFs?

Alan: Thanks, Peter. We're going to have to bear with me here a little bit. We're going to get a bit historical. I'm feeling my Roman side. I was actually born in Bath or Aquae Sulis as the Romans would have called it, for it was a Roman town. In fact, we were still using the original Roman baths until the 1970s. I like to use a Roman God to explain ETFs. Peter, question back to you. What James Bond film actually has a link to a Roman God?

Peter: Alan, that's right in my wheelhouse here. That's Pierce Brosnan's first, if I remember correctly, GoldenEye, Janus.

Alan: That's right, Peter. It's one of my favorite ever James Bond scenes where James goes charging around in a tank in central Moscow. Maybe getting back to ETFs, I like to use Janus to explain what ETFs are. Now for those of you that don't know Janus or maybe aren't into Roman history or haven't yet seen GoldenEye, Janus is in fact, two gods in one. That's represented by the two faces of the God. To me, that's the key similarity to an ETF. ETFs are two things in one.

Some folks say really ETFs are the combination of two existing technologies which together sparked a bit of magic that no one could have predicted and that's a $10 trillion global ETF market. I don't think any of those early pioneers, a few of which I had the pleasure to work with in my past job, had any idea how successful ETFs would be. What are these two technologies?

First up, ETFs are a mutual fund. They're regulated as such. You're talking access to a diversified portfolio and professionally managed. In Canada, ETFs are 81-102 regulated mutual funds. Second up, ETFs trade like a stock and that's where the real magic happened, right? You take the mutual fund and you list it on the exchange and magic and amazing things resulted. Through the exchange listing, ETFs have really democratized investing by making it cheaper and easier to invest in almost every asset class out there.

In a simple and safe stock trade, investors can get access from anything from developed market equity to emerging market bonds. It's such a super powerful tool. Peter, even though ETFs still appear to be that shiny new object in the global investment industry, they aren't really that new, are they?

Peter: ETFs have actually been around for over 33 years and here's a little known fact. The first ETF was actually created right here in Canada. I have a pop quiz for you now, Alan. What ETF that was?

Alan: I want to say it's the TIPS 60, Peter. Is that right?

Peter: Close. You're going to get partial points for that one, Alan. It was the TIPS 35. The Toronto 35 Index Participation Units, which replicated the TSC 35 Index back in the day. You know what? That was actually a full three years before our friends at State Street, south of the border created the S&P 500 Trust ETF, ticker symbol SPY, more commonly known today as a SPDRS, which many listening in probably know of because at nearly 400 billion U.S. dollars, it's the largest ETF in the world.

Going back to Canada, it can appear that we here are small global players in terms of assets. We have about $350 billion in ETF assets listed on major Canadian exchanges. That's pretty small when you compare it to the global $10 trillion ETF market. That being said, Canada is a major player in terms of innovation. As we just mentioned, the first ETF was created here back in 1990. The first fixed income ETF was created here in 2000. The first currency-hedged ETF was created here in 2001. Even the first cryptocurrency ETF was created here a few years ago.

All of this innovation, in my opinion, has contributed to the evolution of the global ETF industry. In the past, ETFs were only passive investment products, meaning that their sole purpose was to effectively replicate passive indexes. Those indexes were usually market cap weighted, meaning that the amount of money invested in each company was pretty much determined by the size of the company, not necessarily the strength of the company. I think many people still believe that's what ETFs are. The truth is, over this 33-year journey, we've gone from passive ETFs to equally weighted ETFs, to quantitative rules based ETFs meant to filter specific types of companies, representative of a style other than size from a larger universe of stocks. If you fast forward to the present, full discretionary, actively managed ETFs are amongst the fastest growing segment of the ETF market. These are ETFs where there's a portfolio manager calling the shots, not a robot or a quantitative screen.

That need has accelerated for a variety of reasons, ranging from recent markets getting more difficult in both equity and fixed income. They also have an increased sophistication of investors, and an aging demographic that have more diverse investment needs. Most believe that simple, low cost passive solutions are not enough to fully address all of these growing needs. It's very exciting that this kind of expertise is now available in an ETF wrapper. Alan, you've been involved with Dynamic Funds since their first ETFs were launched back in 2017. Maybe, you can talk to us a little bit about Dynamic's place in the ETF industry and a little bit about that journey.

Alan: Honestly, it's been a real highlight to be at Dynamic for the launch of the ETF business. There's not that many times in your career you get to do something this exciting and this really meaningful in the business. The Dynamic Active ETF suite is Canada's leading actively managed ETF suite. Like most innovators, we really built on established things and then some innovation was sparked when we brought those two things together, a little like ETFs themselves. We took fundamental, high conviction, Dynamic style active management and delivered it to clients with the latest technology of that ETF wrapper. You're going to get the benefits of the ETF structure, which I talked about earlier, that real time trading, the pricing, the ease of use, plus that Dynamic style active management. We were pioneers and innovators in the space.

As you mentioned there, before we started our business in 2017, almost all the ETFs globally were passive and rules-based offerings run by robots. Active ETFs are actually one of the fastest growing parts of the ETF industry, growing at roughly double that of the passive rules-based space. Clearly, we filled a space in the market. As you also mentioned, we know Canadians prefer active management, you just have to look at the data, the AUM. We're fulfilling that need in the ETF space. There's no doubt that active management is evolving. Listen, you're talking to clients every day, right? Every single day you're looking at flows. What are you seeing out there?

Peter: I am and the feedback I get from clients is consistent with the trends we've been discussing. There is a desire for active management and there's a few reasons for that. Investment-wise, this decade is proving to be much more difficult than the last decade. We've seen quite a bit of volatility in equity markets and fixed income markets. The latter being a real pain point for investors, since fixed income tends to be construed as safe with minimal volatility, perceiving a huge increase in actively managed fixed income ETF flows.

If you combine that with an aging demographic, where the decumulation of assets is becoming more and more important, it makes sense that people are going to be more sensitive to volatility. They want a certain expertise in their investment to help mitigate that risk. Also investors in retirement or close to retirement want income to appease their lifestyle needs. We're also definitely seeing an evolution and expansion within active management, like the massive popularity and option-based strategies like covered call strategies and also the growth in the liquid alternative space.

The latter being a term used for strategies that will incorporate more sophisticated tools like hedging or adding alternative asset classes or leverage with the goal of helping provide suitable risk-adjusted returns. One last thing, with the rise in rates over the last couple of years, we've seen an unprecedented rise in cash-style ETFs. Alan, I know this is an area you follow very closely, not only from a flow standpoint, but from a regulatory and a structural perspective. Do you have any comments on that?

Alan: It's very topical and a good question, right? It's been a while since the global financial crisis, but cash is back. What we saw is ETF issuers really quickly filled the space and developed products as a result. Cash ETFs were born. Cash ETFs are a fairly simple product where the ETF invests in bank deposits and then in turn, pay the interest back to the ETF investors. What's happened recently, though, is regulators have had a look at how the deposits are priced by the bank treasury departments.

At first, banks were paying a really very attractive rate to the ETFs as the treasurers treated the deposits as really high quality retail bricks-and-mortar style deposits. The regulators are now looking at those deposits and what we expect following that investigation is that they'll make the banks pay probably a materially lower deposit rate for cash ETFs. That's definitely something for investors to keep an eye on as they're very popular products with their end investors.

Peter: Alan, I really enjoyed our exchange. We really tackled important topics like what is an ETF, where did they come from and how have they evolved? We also tackled on why they've evolved. A lot of that has to do with the continuous changing needs of investors, the increasing sophistication of the marketplace and demographics. It's exciting to see that ETFs in their current state are excellent tools to address the needs of today's investor. I expect that as ETFs continuously evolve, they will just get more and more effective in addressing investor needs of the future. We're approaching the end of the calendar year. Stay tuned because in our next ETF Exchange podcast, we are going to elaborate a little more on what we've been seeing flow-wise in the Canadian ETF industry over the last year and we might even take a stab at what we expect to see in the year ahead. Until then, thank you very much for listening in to the ETF Exchange and see you next time.

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