Ruth Saldanha: With the year as tumultuous as 2020, it might be hard to see any specific trends. But we've identified three that stood out: Commission-free trading for Canadian investors, ESG or sustainability and strategic beta also called smart beta. Morningstar Canada's Director of Investment Research, Ian Tam is here today to talk about this.
Ian, thank you so much for being here today.
Ian Tam: Thank you as always for having me, Ruth.
Saldanha: Let's start with ESG. What have been some of the major trends this year?
Tam: Yeah, so in terms of sustainable investments, which also include ESG funds, we've seen pretty quick growth. Case in point, if you look at the total assets invested in terms of fund size in retail sustainable investments, at the end of Q3, that just passed about C$10 billion if you exclude fund of funds. Still a very small amount, but in terms of the growth, that's actually a 19% increase when compared to the prior quarter. So certainly sustainable investment products are growing rapidly in Canada. This year we've seen the launch of about 33 new sustainable investments. As a quick reminder that includes ESG funds, impact funds and environmental sector funds, for example, invest in renewable energy. Of those 33 new product launches, 23 of them have actually been launched as ETFs. And we're seeing more and more of these products being launched as passive or indexed investments, which is great because they often come with lower MERs attached to them.
On the performance side, it's actually very good news this year as well, for sustainable investments. We've ranked and rated about 87 of these funds. At the end of November if you look at those funds 65 of them or 75% have actually outperformed their respective category peers. So anecdotally, we can say that this year investing sustainably has actually seemed to help investors, which is great news.
Saldanha: The second trend you identified was strategic beta, which has often been of interest for our readers, what caught your eye in this landscape for 2020.
Tam: Yeah, so just as a quick reminder, strategic beta also known as smart beta, it basically straddles the line between active and passive management. And often these types of strategies will rely on quantitative screening and ranking to produce a portfolio of index like, but slightly active portfolio, if you will. If we look across that landscape in Canada, there's about 144 of these funds in terms of assets they, like many other funds during the month of March, during the pandemic saw significant outflows. And it's been actually a little bit slow to rebuild. So just in this past November, assets in strategic beta reach the same levels as they did pre-pandemic. So, that's one thing that I actually noticed. Second thing is that performance-wise, they actually -- these types of products haven't actually done too well this year. If you look across those 144 funds, about 72% of them have actually underperformed their peers this year. So perhaps quantitative screening or ranking didn't work quite as well, in a very volatile year, like we saw with unexpected twists and turns in 2020.
Saldanha: Finally let's talk about commission-free trading in Canada what happened over there in 2020?
Tam: Yeah, so it's a pretty unique and a very important mark for Canada. In the U.S. just looking down to our neighbours in the south, we've seen the likes of Robinhood get a lot of media coverage in terms of providing commission-free trading. And in Canada, we saw that Wealthsimple trade launched their version of commission-free trading as well. So it's important for the retail investors specifically the do-it-yourself investor because it really lowers the barrier to entry to invest in any fund if you have a very small starting amount. So if you were to open an account with the commission-free trading platform like Wealthsimple or even just another discount brokerage that realistically have low fees -- low commissions, combine that with a low-cost ETF or possibly one of these new all in one ETFs that's a very good deal for you as an investor, especially if you have small starting amounts. And you don't want to pay a lot in terms of the management fee or commissions in trading. So, a very good sign for the retail investor in Canada.
Saldanha: Thanks so much for being here today with your perspectives Ian.
Tam: Thanks, Ruth.
Saldanha: For Morningstar I'm Ruth Saldanha.
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