Valerie: Welcome back to ETF Innovators where we track the evolution of the global ETF industry and shine a spotlight on the leaders, ideas and strategies powering the next wave of performance. Now, the ETF industry has been changing at a rapid pace, and today I'm thrilled to have an expert here to walk us through those changes, challenges, and opportunities We have Scott Davis, Head of ETFs at Capital Group. Thank you so much, Scott, for joining us today.
Scott: Thanks for having me.
Valerie: Now, Capital Group has been at the forefront of the asset management industry. You have a rich history, over 90 plus years, of looking after clients and investor assets. Can you talk to us a little bit more about how you've brought the Capital Group investment philosophy into the modern day, and particularly within adapting those changes for investing in an ETF vehicle itself?
Scott: Yeah, we're guided by our mission, which is to improve people's lives through successful investing and for, as you said, over 90 years we've been doing that. So, as we look to bring our investment strategies, which range from equity to fixed income to multi-asset, we did think long and hard about what the investor's experience would be, and with an exchange traded fund, that investor experience is happening on an exchange in a secondary market. So, what was very important to us was to understand how our ETFs would be priced, how investors would access them. So, what that led us to do was to think, ‘Okay, well what are the securities that go inside? Are they liquid and able to be priced readily throughout the day? Will market makers and the rest of the ETF ecosystem be able to, to service that?’ Because ultimately those types of decisions lead to the trading costs and the all the end investor experience. Our ETFs across 25 US ETFs and four Canadian ETFs trade at some of the tightest spreads that that exist on the market for active ETFs. And you know, ultimately that just translates to more returns and better investment outcomes for our investors.
Valerie: Active management has seen a resurgence in recent years, and especially within the ETF vehicle itself as well. Here in Canada, active ETFs have just eclipsed the number of passive ETFs and fund flows are following in the US and Canada. Capital Group obviously an expert here in this area. Scott, could you walk us a little bit more through the Capital Group philosophy?
Scott: Capital's investment process is rooted in fundamental research, and we have a unique way of approaching that. We have portfolio managers and analysts working alongside one another.
So as we thought about bringing that into the ETF ecosystem and recognizing that active ETFs were still fairly new, we thought about how we would position it and we decided to take our investment strategies that really are suited for the core of an investment portfolio, and we've taken investment strategies in U.S. equity, international equity, global equity, as well as all aspects of fixed income and even as I mentioned, multi-asset. And we've really designed a suite that allows us to achieve a whole multitude of investor objectives. All actively managed, all delivered with the Capital System. And here in Canada we launched four. And you know, those too were designed to be able to occupy core asset allocation portions of portfolios because that's where we can make the biggest difference in investors' lives.
Valerie: And I think that sets Capital Group apart as well as a very unique feature to be focused on the core building blocks of portfolios, but delivering a cost effective, best in class active management. So, it's a really complimentary offering you have.
Scott: Yes, definitely. I think what we found is that ETFs, there's a lot of them, and they come in all shapes and sizes, and for a long time, ETFs were synonymous with index or rules-based strategies. So, when we came to market, we were really excited to bring something different, something that investors could use to seek better-than-index returns or different volatility or risk outcomes that they were seeking to manage tand, and that's really what we've done.
Valerie: There has been a lot of recent innovation in the ETF space, specifically the actively managed ETF space. I'd love to hear a little bit more about what current market dynamics you think are impacting the ETF business and where do you see this going in the near future?
Scott: While ETFs are over 30 years old, actively managed ETFs are still relatively new. And while they existed here in Canada for the last 15-plus years, in the U.S. the offerings were pretty limited before 2019. And 2019, that's when Rule 6c-11 or the ETF rule passed, and really changed the frame for managers in the U.S. and really, I think influenced the global ETF trends because once that rule passed, active managers and passive managers have the same rules to launch an ETF. It became much faster, much simpler, and much more cost effective. What that's done is drastically increase the number of ETFs out there. In the U.S. now there are also more actively managed ETFs than index-based ETFs.
Flows are close to 40% in active management. And, you know, assets globally now in the $17 trillion ETF market are nearly 10% actively managed. So, you know, I think what we've seen is a seismic shift in the way the ETF vehicle is being perceived, how it's being used in portfolios and where people are sending their dollars.
Valerie: Now Capital Group is just celebrating its one-year anniversary of having ETFs in the Canadian market. Happy birthday. I was just wondering what observations have you made and how does that shape what you're thinking about the Canadian market going forward?
Scott: Sure. It's been, it's been an exciting year for us here. We launched one year ago with our four ETFs here in Canada. And you know, I think we had a lot of ideas of why Canadian investors might choose an ETF, but with different tax rules than the U.S. we candidly wanted to learn as well. So, I mean, what we've observed is ETFs, some people just prefer them, sometimes it's a user preference in the way they want to interact with their investments. There are many reasons people choose an ETF, and really what we wanted to be able to do was offer them that choice. And so, whether it's in the U.S. and Canada or globally, I think ETFs are benefiting from this strong adoption based on what is an ETF ecosystem that feels modern, that feels digitally native, and is compatible with the way many people want to live their financial lives and their regular lives.
Valerie: How do you go about thinking about lessons you've learned in different geographies and how can you port best ideas back and forth also keeping, you know, the pulse on the local market as well.
Scott: You know, whenever we think about bringing new products to market, we start with the investor and we think about how does that investor asset allocate, what objectives are they trying to reach? What are the local laws and regulations that govern the vehicles? As we look at the Canadian market, we think about what the typical portfolio looks like, what is the typical investor, retirement outlook and what are they looking to achieve? And so as we look ahead, I think we see opportunities to do that with additional services that focus on income and that think about capital appreciation. Later the accumulation phase and into retirement. I mean, there's so many ways we can serve investors differently and the ETF gives us that opportunity.
Valerie: That's fantastic. And it sounds like you've got a very big runway.
Scott: Definitely. Yeah, it's exciting. I think the ETF industry is growing tremendously and you know, ultimately, I think more choice and more options for investors generally will lead to better investor outcomes.
Valerie: Now Scott, at the end of each ETF Innovator's video, we'd like to do a quick rapid-fire session. Are you ready for some hot takes?
Scott: I'm ready.
Valerie: All right. Short duration or long?
Scott: Yes.
Valerie: US or international?
Scott: International
Valerie: Value or growth?
Scott: Growth.
Valerie: A unique ETF theme in the current market.
Scott: ETF models, people putting ETFs together, uh, and forming their own investment strategies.
Valerie: Great. Your favorite ETF ticker?
Scott: CGGO. It's our global ETF in the us, which is similar to CAPG here in Canada.
Valerie: Great. And name one ETF that everyone should know about.
Scott: CAPM or CGMS, a multi-sector income fund that looks across the credit and securitized spectrum for income opportunities.
Valerie: Wonderful. Well, thank you so much for joining us today, Scott.
Scott: Thanks for having me.
Valerie: I'm Valerie Grimba, thank you so much for watching this episode of ETF Innovators. Please join us next time as we continue to walk through the new and innovations that are helping shape the global ETF industry.