What are we looking for?
Top-rated active equity and fixed-income ETFs
The screen
Morningstar research has long identified that the fees charged by an investment fund has the largest impact on returns an investor receives over the long run. To this end, many investors have sought more affordable investments through exchange-traded funds, or ETFs. These vehicles offer investors lower-cost investment funds that can, in some cases, also offer more flexible trading options: ETFs trade – and are therefore priced – throughout the day on an exchange, whereas mutual funds are priced once at the end of the day. But while costs savings exist from a fee perspective, ETF investors may have given up some potential benefits – over half the ETFs in existence today are index-tracking, meaning investment decisions within the fund are intended to match a specific market index and are not exposed to any active investment decisions. However, investment management firms have been rapidly expanding their offerings to include actively managed ETFs, which allow investors to benefit from active management within an ETF structure.
Investor demand and product innovation has driven an expansion of these types of ETFs – more than 67 per cent of active ETFs in Canada were launched in the past five years. Although allocation funds (funds that include a mix of stocks and bonds) are among the largest active ETFs, I used Morningstar Direct to screen over 700 active ETFs to highlight some good equity and fixed-income funds that meet the following criteria:
- A Morningstar Medalist Rating of Bronze, Silver or Gold, indicating a forward-looking view of the fund’s ability to outperform its peer group and/or relevant benchmark on a risk-adjusted basis over a full market cycle.
- A Morningstar Rating (aka “star rating”) of four or five stars. The star rating is an objective look back at a fund’s after-fee, risk-adjusted returns relative to the category to which the fund belongs. Though the measure is backward-looking, Morningstar’s research shows that over time, and on aggregate, five-star funds continue to outperform four-star funds, three-star funds, etc., after receiving the rating.
- A top-quartile category rank over the year-to-date and three-years (as of Oct. 20, 2023), indicating the funds selected have outperformed their peers over those time periods.
- Global broad category, which is equity or fixed income
What we found
Although the screen’s results represent funds across a variety of asset classes, regions and styles, there is a bias towards fixed income. This may be because fixed-income funds generally returns less, on average, than equity funds, making the cost savings from fees more prominent among fixed-income funds.
This article does not constitute financial advice. Investors are encouraged to conduct their own independent research before purchasing any of the investments listed here.
Danielle LeClair, MFin, is director of manager research, Canada for Morningstar Research Inc.
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