ETF market outlook: How factor and active ETFs are behaving through volatility - Andrew Clee and Bobby Barnes

May 5, 2020

Andrew Clee, VP of ETFs, and Bobby Barnes, quantitative analyst, provide their outlook for ETFs during market volatility due to COVID-19. Andrew notes that over the last month, international equity has been a major winner in the Canadian ETF space and in the U.S., value equity has seen traction. He believes that trends occurring in the U.S. tend to spill over into Canada, so value equity may see more traction in the Canadian ETF market. Bobby notes the U.S. market’s pick-up in value may be perceived as investors being bullish and hopeful of the stock market having reached a bottom. He caveats that timing the market is extremely difficult and there is still uncertainty.

Andrew says pairing investments based on management styles (active, factor-based or passive) varies for each investor, it is important to consider financial goals and life stages. Andrew defines the difference between different types of ETFs: passive ETFs mimic the movements of an index (e.g. S&P 500 index), so the ETF will perform similarly to how the market performs. A factor ETF is more specific, as it mimics a custom index, which contrasts to a broad market index. Factor ETFs seek companies that have a specific factor (e.g. low-volatility companies). By comparison, actively managed mutual funds are ultimately run by portfolio managers who use both quantitative analysis and their insight from meeting with company executives. He alludes to the benefits of factor ETFs, as investors can focus on a specific outcome desired for their investments, based on their unique needs.

Bobby considers this as an interesting time for dividend-earning companies, given right now these are unique circumstances due to COVID-19. During non-recessionary periods, Bobby says dividend cuts hint that a company’s financial health is potentially deteriorating and may possibly underperform in the future. However, during a time like this, Bobby believes dividend cuts may indicate executives are managing their cash flows to continue operations during this economic uncertainty. Bobby reminds investors of the financial crisis in 2008, where some of the top performing companies in the recovery were those who cut their dividends during the recession. He alludes to the importance of diversification, which is an asset of Fidelity’s suite of dividend factor ETFs.

Recorded on May 1, 2020