Category

Intelligence

Canadian ETFs: September’s Launches

In September, the Canadian ETF Industry reached $319 billion in assets under management. New products launched this month include Canada’s first multi-cryptocurrency ETF and leveraged ETFs with exposure to Canadian REITs. 

Evolve Funds Group introduced the Evolve Cryptocurrencies ETF (“ETC-T”), designed to provide investors with one convenient way to obtain exposure to bitcoin and ether, on a market capitalization basis, through an ETF structure. The ETF will provide exposure to bitcoin and ether by investing in Evolve’s Bitcoin (“EBIT-T”) and Ether (“ETHR-T”) ETFs. ETC charges no management fees, however, the underlying investment funds held by the Fund will pay management fees. Currently, the management fees on EBIT and ETHR are 0.75% of net asset values, plus applicable sales taxes. 

Horizons ETFs launched two new ETFs that provide leveraged and inverse leveraged exposure to the Canadian Real Estate Investment Trusts sector, an industry classification comprised of owners, operators and managers of residential, commercial and industrial properties. Investors can invest those views on either the long or short-side of the Canadian REIT sector without taking on the high costs of using margin, borrowing or shorting directly. 

The BetaPro Equal Weight Canadian REIT 2x Daily Bull ETF seeks daily investment results, before fees, expenses, distributions, brokerage commissions and other transaction costs, that endeavour to correspond to two times (200%) the daily performance of Solactive Equal Weight Canada REIT Index. The BetaPro Equal Weight Canadian REIT –2x Daily Bear ETF seeks daily investment results, before fees, expenses, distributions, brokerage commissions and other transaction costs, that endeavour to correspond to two times (200%) the inverse (opposite) of the daily performance of the Solactive Equal Weight Canada REIT Index. 

Canadian ETFs: August’s Launches

In this article written for The Globe And Mail, we look at Canadian ETFs: August’s launches.

The Canadian ETF industry product line-up continues to expand with innovative ETFs. Sustainable fixed income ETFs and inflation-protected ETFs were introduced. An ESG-friendly bitcoin ETF was also added to the market.

Accelerate Financial Technologies Inc. introduced the World’s first carbon-negative bitcoin ETF. Bitcoin ETFs have attracted over $3 billion in assets under management. With all the major central banks still using quantitative easing and pumping money supply, investors continue to pour money in bitcoin due to its limited supply. However, its big carbon footprint has been a major concern for investors.

The Accelerate Carbon-Negative Bitcoin ETF gives exposure to bitcoin while reducing its carbon footprint. Accelerate works with a leading third-party to execute a global tree-planting campaign to sequester carbon emissions and help fight climate change. Up to 10% of ABTC’s 0.69% management fee will be allocated to Accelerate’s annual tree-planting campaign. The initial decarbonization initiative will be focused on planting mangrove trees in Madagascar. For each $1,000 investment in ABTC, approximately one net tonne of carbon dioxide is expected to be sequestered per year.

RBC iShares expands its sustainable ETF platform and fixed income lineup with the addition of four ETFs. The new sustainable ETFs, iShares ESG Advanced 1-5 Year Canadian Corporate Bond Index ETF and iShares ESG Advanced Canadian Corporate Bond Index ETF, provide exposure to the Canadian dollar investment grade corporate bond market, and currently seeks to track indexes that are designed to provide efficient exposure to companies demonstrating more sustainable business practices relative to their industry peers, while also excluding issuers from industries with elevated sustainability-related risks.

The new U.S. fixed income ETFs – the iShares U.S. Aggregate Bond Index ETF and iShares U.S. Aggregate Bond Index ETF (CAD-Hedged) – provide exposure to the U.S. dollar-denominated investment grade corporate bond market.

There were no ETF terminations in August.

 

 

Canadian ETFs: July’s Launches and Terminations

In July, the Canadian ETF Industry reached $313 billion in assets under management. New Fixed Income ETFs and ESG ETFs were added to the product line-up. 

RBC iShares expanded its Fixed Income line-up with the addition of five new ETFs. “With the launch of these new ETFs, RBC iShares continues to deliver high quality fixed income strategies to support portfolio construction, helping advisors and investors meet their long-term investment objectives. With both low interest rates and inflation top of mind today, these new ETFs give investors additional tools to diversify their fixed income portfolios, enabling easy access to U.S. corporate bonds and inflation-linked bonds,” said Steven Leong, Head of iShares Product, BlackRock Canada. 

The iShares U.S. IG Corporate Bond Index ETF, iShares 1-5 Year U.S. IG Corporate Bond Index ETF and iShares 1-5 Year U.S. IG Corporate Bond Index ETF (CAD-Hedged) provide exposure to the U.S. dollar-denominated investment grade corporate bond market. The iShares 0-5 Year TIPS Bond Index ETF and iShares 0-5 Year TIPS Bond Index ETF (CAD-Hedged) provide exposure to inflation-indexed U.S. Treasury bonds with remaining maturities of less than five years. 

CIBC Asset Management launched a suite of Sustainable Investing ETFs that provide access to actively managed strategies that seek to align with the investing values of socially responsible investors. 

The CIBC Sustainable Investment Solutions are designed to align investors’ wealth with a values-based approach focused on responsible investing. The solutions also aim to have a lower carbon footprint and energy sector exposure than broad market indices, and employ positive sector screening for companies involved in the renewable energy space and green bonds. The products utilize CIBC Asset Management proprietary ESG analysis and portfolio construction methodology in conjunction with customized screening from Sustainalytics. 

Desjardins terminated its suite of Multifactor-Controlled Volatility ETF on July 28, 2021. 

 

Canadian ETFs: June’s Launches and Terminations

The Canadian ETF industry keeps on expanding, reaching $308 billion in assets under management at the end of the second quarter. Most new inflows poured in sector ETFs during the first half of the year. In June, eleven new products, including ESG and themed ETFs, were added. 

Franklin Templeton Canada partnered with boutique Investment Managers with proven Sustainability expertise to list a suite of Sustainable investing ETFs. This sustainable ETF suite comprises of a global fixed income ETF, that strives for attractive income generation and total return while guarding against downside risks, a global infrastructure active ETF, which invests in equity securities of sustainable issuers supporting infrastructure assets, and an international growth ETF, which invests in equity securities of sustainable issuers outside the U.S. and Canada. Franklin Templeton Canada will launch two more sustainable ETFs covering emerging markets and global equity markets in July. 

Adding to the ESG trend, Horizons ETFs issued Canada’s first ETF focused exclusively on providing exposure to a portfolio of global green bonds – a type of fixed-income instrument that raises capital for projects with specific environmental objectives or benefits. The Horizons S&P Green Bond Index ETF seeks to replicate the performance of the S&P Green Bond U.S. Dollar Select Index, net of expenses. The Index seeks to measure the performance of global green-labelled bonds issued in U.S. dollars that are subject to stringent eligibility criteria to fund projects that have positive environmental or climate benefits. 

Horizons ETFs also introduced a range of themed ETFs covering the global semiconductor space, global lithium producers and global hydrogen space for the first time in Canada. 

The Horizons Global Semiconductor Index ETF tracks the performance of the Solactive Capped Global Semiconductor Index, designed to provide exposure to the performance of global, publicly listed companies engaged in the production and development of semiconductors and semiconductor equipment. The Horizons Global Lithium Producers Index ETF tracks the performance of Solactive Global Lithium Producers Index, designed to provide exposure to the performance of global, publicly listed companies engaged in the mining and/or production of lithium, lithium compounds, or lithium related components. Horizons Global Hydrogen Index ETF tracks the performance of the Solactive Global Hydrogen Industry Index, designed to provide exposure to the performance of global, publicly listed companies engaged in the development and production of fuel cell technology and equipment, as well as infrastructure, components, and systems for hydrogen generation, storage, and transportation. 

Canadian ETFs: May’s Launches

At the end of May, the Canadian ETF Industry reached assets under management of $297 billion. The ETF product line-up keeps on expanding with new ESG and sector ETFs, including Canada’s first Shariah-compliant ETF. 

Wealthsimple launched the Wealthsimple Shariah World Equity Index ETF. The ETF excludes companies deriving more than 5% of their income from alcohol, tobacco, pork-related products, weapons, conventional banking or insurance companies, and adult entertainment. It also excludes companies with excessive leverage. It currently seeks to replicate the performance of the Dow Jones Islamic Market Developed Markets Quality and Low Volatility Index. The ETF and its underlying index have been certified by a team of Islamic researchers at Ratings Intelligence Partners, and dividend purification information is made available quarterly. 

Also in the ESG space, Evolve Funds added new ETFs that bring carbon neutrality to traditional indices. Its CleanBeta suite strives to decarbonize the core of investor portfolios. The Evolve S&P/TSX 60 CleanBeta Fund and the Evolve S&P 500 CleanBeta Fund seek to provide long-term capital growth by replicating, net of fees and expenses, the performance of the S&P/TSX 60 Index and S&P 500 Index, respectively, while striving to offset the carbon footprint of the constituent securities in the portfolio. To achieve this, Evolve will rely on a carbon footprint calculation provided by the S&P Dow Jones Indices utilizing Trucost to determine the carbon exposure of the companies in the indices. The ETFs will employ a variety of strategies, including purchasing and retiring carbon credits, as a means to neutralize the full carbon footprints.

ESG Integration

ESG integration is the explicit inclusion of ESG risks and opportunities into traditional financial analysis and investment decisions based on a systematic process and appropriate research sources. In other words, it refers to considering material ESG issues in addition to other traditional financial metrics when building a portfolio.

This approach puts an equal weight on each component of ESG. Environmental issues such as carbon emissions are as important as social issues like labor relations. The essence of ESG integration is to consider material ESG issues that are expected to affect a company’s performance. It is in line with the portfolio selection process of identifying any material information that can have potential impact, ranging from accounting disclosures to ESG issues. Many investors are already integrating ESG informally without realizing it.

In order to assess material ESG issues, portfolio managers and their team must conduct comprehensive research and identify issues that impact returns. ESG Integration adds another layer to the already extensive research undertaken when investing. Inovestor offers ESG data, powered by Sustainalytics, that help minimize the time and effort required to integrate material ESG issues. We provide a breakdown of the ESG Risk Rating, Notable Material ESG Issues, Product Involvement and a list of Controversies on over 12,000 companies worldwide.

Implementation

The Principle for Responsible Investment (PRI) outlines four stages of the integration model:

  1. Qualitative analysis
    Investors collect and identify pertinent information from company reports or third-party investment research.
  2. Quantitative analysis
    Investors analyze material financial information and adjust their financial forecasts and/or valuation models appropriately.
  3. Investment decision
    From steps 1 and 2, a decision to overweight, hold or underweight the securities is made.
  4. Active ownership assessment
    Investors can use their qualitative and quantitative analysis to initiate or support company engagements and/or inform voting.

Illustration

We applied quantitative screens using InoAdvisor’s screener to get fundamentally sound TSX-listed companies with stable or growing dividends over the past year. Using the SG overlay, we applied a qualitative screen to filter low E/S/G risk score.

Here are the filters applied:

  • Market capitalization of $100 million or above,
  • Sales of $10 billion or more,
  • Dividend Yield of 1.5% or above,
  • Stable or growing 1Y Dividend yield,
  • Positive EPS,
  • Stable or growing 1Y EPS,
  • Stable or growing 2Y EPS,
  • Net Operating Profit of $10 million or above,
  • Stable or growing 1Y Net Operating Profit,
  • Stable or growing 2Y Net Operating Profit,
  • Economic Performance Index (EPI) of 1 or above,
  • Environmental Risk Score of less than 10,
  • Governance Risk Score of less than 10 and
  • Social Risk Score of less than 10.

Unsurprisingly, the screen is composed mostly of financial companies. Banks and Insurance companies tend to have good fundamentals and low ESG risk due to the nature of their business. They have been early adopters of sustainability principles.

For a list of this screen, click here. Contact your account executive if you are not already subscribed to our new ESG add-on.

Power Corporation of Canada stands out. It has the highest dividend yield and lowest ESG Risk Rating from the screen. Its Economic Performance Index of 1.53 implies that the Return on Capital is 1.53 times the Cost of Capital.

From its 2020 Annual Report, Power Corp has been very active in the Sustainability space. It has been a signatory to the United Nations Global Compact since 2014 and contributes to the Sustainable Development Goals (SGDs). Power Corporation was one of the only three Canadian companies to receive the Top score of A (Leadership) of the CDP, a non-for-profit charity that runs the global disclosure system for investors, companies, cities, states and regions to manage their environmental impacts, in 2020.

Canadian ETFs: April’s Launches and Terminations

Cryptocurrency flooded the Canadian ETF market this month with fifteen ETF listings. The World’s first Ethereum ETFs hit the industry on April 20th. Shortly after, multiple other providers issued their own Ether ETF, some racing to attract investors by waving management fees. 

Investors can choose between CI Galaxy Ethereum ETF, Evolve Ether ETF, Purpose Ether ETF and the 3iQ CoinShares Ether ETF. CI Galaxy waived the full 0.40% management fee on the ETF until June 15, 2021 while Evolve ETFs waived the full 0.75% management fee on the Ether ETF until May 31, 2021. Purpose Ether ETF and 3iQ CoinShares Ether ETF each charge management fees of 1%. 

As interest in this asset classurge, Horizons ETFs introduced the BetaPro Bitcoin ETF (“HBIT-T”) and the BetaPro Inverse Bitcoin ETF (“BITI-T”)HBIT and BITI provide long and short exposure to Bitcoin through the use of futures contracts and derivatives. These instruments cater to investors who want to bet on the direction of the volatile digital coin. HBIT charges management fee of 1% and BITI charges a management fee of 1.45%. 

In other new launches, Horizons ETFs introduced the Horizons Global BBIG Technology ETF (“BBIG-T”). The ETF tracks the Solactive Global BBIG Index, which is designed to provide exposure to the performance of publicly listed large-cap and mid-cap global equities in the following industries: secondary battery, biotechnology, internet, and gaming – represented by the acronym, BBIG. 

CI Global Asset Management has merged the following ETFs:

Unitholders of each Terminating ETF have received units of the Continuing ETF based on the stated exchange ratio, as set out in the table above, for each unit of the Terminating ETF held as at April 16, 2021. 

 

How to add ESG factors to your portfolio? Positive/ Best-in-class screening

The best-in-class approach involves selecting top companies in terms of ESG metrics. These companies are actively making an effort to improve their ESG impact. Best-in-class screening rewards them by overweighting these companies in their portfolios. 

This method has the advantage of including companies that operate in industries that are not necessarily ESG-friendly. To illustrate, the energy sector is one of the worst sectors for sustainable investment due to its devastating effects on the environment. The energy sector represents 10.2% of the total nominal gross domestic product in Canada and represents over 12% of the S&P/TSX Composite Index as of March 31, 2021. Excluding this sector would mean a substantial deviation from the main Canadian market index. Positive screening also has the benefit of encouraging companies to adopt better ESG guidelines because that would make them more competitive compared to their peers. 

However, implementing a best-in-class screen is time-consuming, if done without the use of third party ESG ratings. Analysts must examine each company in the universe and rank them in terms of sustainability. Third party such as Sustainalytics, offered by InoAdvisor as an add-on, can considerably improve this tedious process. We provide a breakdown of the ESG Risk Rating, Notable Material ESG Issues, Product Involvement and a list of Controversies on over 12,000 companies worldwide. 

Implementation 

Best-in-class selection can be done on an absolute basis, when companies are selected based on their outperformance in terms of ESG characteristics in the entire universe, or on a relative basis, when companies are compared to their competitors within the same industry/sector and are selected based on their superior ESG ratings. 

We focus on the relative basis as it is the most used method. The steps are as follows: 

1. Assign an ESG rating to each company in the investible universe

Each company
has to be analyzed and assigned an ESG score in order to compare companies across sectors or industries and determine which ones are the best in terms of ESG performance. An alternative to this lengthy process is to use readily available ESG data providers.

2. Rank the stocks from best to worst in each sector

Classify the companies in each sector or indus
try from best ESG scored companies to worst ESG scored companies.

3. Overweight the ESG leaders and underweight the ESG losers in your portfolio

Depending on your strategy, you can overweight top ESG companies and underweight bottom ESG companies or only include top ESG companies in your po
rtfolio

Illustration 

Using the InoAdvisor’s screener, we find the best-in-class stocks in the Canadian energy sector. 

We apply the following filters to stocks listed on the TSX: 

  • Energy sector, 
  • Market capitalization of $1 billion or above, 
  • Current SP Score of 5or higher and, 
  • Positive Return on Capital. 

We get a list of 11 Canadian energy companies, ranked from lowest ESG risk exposure to highest ESG risk exposure. Portfolio Managers using the best-in-class approach will favor the lowest ESG risk exposed companies, which implies a higher ESG rating, to their portfolios. 

For a list of this screen, click here. Contact your account executive if you are not already subscribed to our new ESG add-on. 

Pembina Pipeline Corporation (PPLis the top company in our screen. Despite a high Overall Exposure Score of 44.3, the company’s ESG Risk Rating stands at 20.2. Iis able to considerably manage its ESG risk through its ESG measures. From their Sustainability Report 2020, Pembina 

  • Focuses on safe working conditions, with their safety records continuously exceeding the industry average, 
  • Is once again recognized as one of Canada’s Top 100 Employers, 
  • Advanced the implementation strategy for their Carbon Stand as well as their Inclusion and Diversity Stand, 
  • Demonstrated support to the communities in which they have a presence, with a direct investment of $10 million in 2019, a 30 percent increase over the prior year.

The Best-in-class ESG Integration technique helps investors align their values and enhance their risk-adjusted returnsUsing third-party ESG data improves the integration process by reducing the time and effort required to analyze how sustainable companies are. This method encourages companies to consider ESG issues in addition to their bottom-line because mindful investors favor ESG-friendly companies.

Canadian ETFs: March’s Launches and Terminations

The Canadian ETF Industry ended the first quarter of 2021 with assets under management of $278 billion. The number of new ETF listings keeps on increasing with 23 new listings added in March. 

RBC iShares expanded its Sustainable ETFs suite with three ESG Leaders ETFs. These ETFs currently seek to track MSCI indices that are designed to provide efficient exposure to companies demonstrating more sustainable business practices relative to their industry peers, while providing sector balance and market coverage. The ETFs can be used as sustainable equity building blocks for the core of a portfolio. 

Desjardins also launched an ESG ETF. The Desjardins RI Emerging Markets – Low CO2 Index ETF (“DRME-T”) complements the range of ETFs designed to significantly reduce carbon intensity relative to traditional equity indices. Under normal market conditions, the Fund will primarily invest in large and mid-cap companies from the Scientific Beta Emerging Markets Universe while seeking to deliver a significant reduction in the weighted average carbon intensity of the Fund’s portfolio and ensuring that all Constituent Issuers meet Pre-Determined ESG Standards. 

Emerge Canada Inc. introduced Canada’s first space exploration ETF, sub-advised by ARK Investment Management LLC. The Emerge ARK Space Exploration ETF is an actively-managed exchange-traded fund that invests in global equity securities of companies that are or, are expected to be, focused on leading, enabling, or benefitting from technologically enabled products and/or services that occur beyond the surface of the Earth. Its top holdings, as of March 31st, are Trimble Inc. (“TRMB-Q”)Kratos Defence and Security (“KTOS-Q”) and L3harris Technologies Inc. (“LHX-N”). 

CI First Asset launched the cheapest bitcoin ETF, in terms of management fee. The CI Galaxy Bitcoin ETF is the World’s third bitcoin ETF. Interest in the cryptocurrency space is acceleratingThe first bitcoin ETF has already hit a billion dollars in assets under management in less than two months of tradingHorizons ETFs even came out with an inverse bitcoin ETF on April 15th for investors who want a short exposure to bitcoin.

Horizons ETFs, Harvest ETFs and Accelerate Funds have reorganized their product suite and terminated the following ETFs in March: 

BlackRock Canada lowered the management fees on its core Canadian Fixed Income ETFs, effective April 1st.

How to add ESG factors to your portfolio? Negative/ Exclusionary screening

There’s a variety of methods to incorporate ESG factors into your portfolio. In this blog post series, we go over each of them, consider their benefits and drawbacks, and see how they can be implemented using Inovestor for Advisors.

Today, we look at negative, also called exclusionary, screenings. Negative screening entails the exclusion of companies, sectors, or countries based on specific activities that go against investors’ ethics or values. 

In its early days, ESG exclusionary screens were mostly implemented to target religious investorsInvestors would screen out companies involved in products that went against their faith. For example, tobacco, alcohol and gambling are among the sectors prohibited in Islamic Finance. Nowadays, negative ESG screens are used by a broadeaudiences, filtering out companies involved in a variety of values-based factors, like controversial weapons or animal testing. 

It can also be applied to specific countriescompanies and individuals. Many countries, including Canada, impose sanctions on other countries, organizations, or individuals that are responsible for gross violations of internationally-recognized human rights, such as extrajudicial killings or nuclear programs. These sanctions prevent trade, financial transactions or other economic activity with the sanctioned countries. Portfolio managers can proactively exclude countries and companies they believe are acting in unethical ways and are expected to be sanctioned. 

Negative ESG screening is the easiest and most widely-used way to implement ESG investing. By simply excluding companies involved in activities investors condemn, they are presented with a broad investible universe cleansed from companies directly involved in unacceptable activities. And, in good news, negative ESG screening does not wipe out the majority of the investible universe. As such, this is a good introductory method to ESG investing. Unlike the other methods, idoes not involve extensive research to identify what each company is doing to be more sustainable and mitigate their ESG risks. 

The main criticism of exclusionary screens is that investors “wash their hands rather than attempt to solve the problems. It is a passive way of dealing with ESG issues. Investors may not supporting unethical companies financially, but they are not encouraging them to take more ethical approaches, either. Additionally, within ESG filters, companies not involved in immoral products are all on the same level, without actually rewarding more sustainable ones.  

Implementation 

As mentioned, exclusionary screening is the easiest method of incorporating ESG to your portfolio. Here are the steps to implement negative screening: 

  1. Define products, sectors or countries to exclude

It is important to know which products, sectors or countries your clients don’t want in their portfolio. Adding the definition of each negative product, sector or country in the Investment Policy Statement (IPS) as part of the Know Your Client (KYC) procedures helps portfolio managers or investment advisors during portfolio construction or rebalancing. 

2. Filter out all companies knowingly involved in these products  

Once you have identified and defined which products, sectors or countries to exclude, you can screen out all companies that are directly involved in negative products. We offer a screener with ESG data, including controversial product involvement of companies. It removes the manual and time-consuming task of identifying these companies. 

3. Apply additional screens and models to the ethical investible universe 

After removing companies involved in negative products, additional financial filters can be applied or you can apply a model to your “ethical” investible universe to create your portfolio.
 

Example 

Inovestor for Advisors’ screener has a new feature for subscribers who have the ESG add-on. It allows users to add ESG screens on top of other StockPointer’s filters as an overlay. We used this newly launched ESG overlay to implement a negative screen.

 We applied the following filters to companies listed on NYSE and NASDAQ: 

  • ESG exclusionary criteria: Companies not involved in “sin products” including tobacco, adult entertainment, gambling, abortion, contraceptives, human embryonic stem cell and fetal tissue. 
  • Market capitalization of $10 billion and above, 
  • A positive Net Profit, 
  • Revenue of $100 million and above, 
  • Return on Capital of 10% and higher, 
  • Economic Performance Index (EPI) of 1 and above, 
  • EPI 12-month change of 1 and above and 
  • Current SP Score of 50 and higher, 

Our final screen consists of 21 large-capitalization companies with high economic performance and purified from “sin” products.

Make sure to contact your account executive to add Sustainalytics’ ESG data if you’re not already subscribed. For a full list of this screen, click here: ESG negative screen.

Its ease of implementation and its usefulness to align investors’ values with their investments make exclusionary screening the most commonly used technique to include ESG factors in the portfolio.