Growth of ETFs can disrupt the mutual funds market, says Steven Hawkins

he impact of artificial intelligence on the investment industry has just begun, says Steven Hawkins

In an interview with Ashley Coutinho, Steven Hawkins, president & chief executive officer, Horizons ETFs Management, says since money is a very personal thing, some form of human intervention will be required. Edited excerpts:

Globally the total ETF assets under management is about $6 trillion. What are the broad trends and interesting themes that you see playing out in the global ETF space?

I see three that are happening in nearly every market right now. One, there is a movement towards lower fees: more and more investors are taking control of their investments and they’re looking for cost-effective products. That’s creating competition and forcing innovation for providers looking to be the issuer of choice for investors. Two, there is a greater focus on liquidity. With the growth of passive investing, investors want a simple way to trade in and out of different indices and asset classes. ETFs, with their transparency and intraday trading are becoming more popular because of this trend. This is putting pressure on the mutual fund industry in all maturing capital markets around the world. Third, there is product proliferation. Investors are being overwhelmed by new products – many of which are nearly identical to others trading on the same exchanges.  

What makes your firm different from all other ETF providers?

In one word: innovation. Horizons ETFs has a history of bringing first-of-their-kind ETFs in Canada and the world, to market, from marijuana, to artificial intelligence driven global-equity, the first family of actively managed ETFs.  In Canada, we manage the only suite of leveraged and inverse leveraged funds. We also manage a unique, tax-efficient suite, which includes Canada’s lowest-cost ETF. 

From the beginning, we have been an ETF provider, unlike many of the banks and mutual fund providers now entering the ETF industry because they are losing assets and market share, in Canada and the US if you are not an ETF issuer, you have already lost the battle.

Could you tell us more about Horizons Marijuana Life Sciences Index ETF? How do you see the recent legalization in marijuana benefiting your ETF?

Horizons Marijuana Life Sciences Index ETF (HMMJ) was the world’s first cannabis ETF to offer investors the chance to invest in the burgeoning cannabis market. We launched it in April 2017 before legalization occurred. Today, it’s still considered the benchmark for assessing the health of the cannabis sector. Ultimately, the cannabis space, like any emerging sector, is still very volatile – the sector is currently down rather significantly from its highs around Canada’s legalization date. However, more opportunities are emerging globally – advancements toward legalization in the United States are happening right now and have the potential to transform global attitudes and markets. 

Horizons ETFs has reduced the management fees of four of its funds, including its first socially responsible investing ETF, by 20 basis points each. How important is cost in driving flows into ETFs? What are the factors driving costs lower?

Today, outside of having first mover advantages, it might be the most important thing. As more self-directed, do-it-yourself investors realize they can take their investing power into their own hands, they’re increasingly looking for products that ensure that more of their money is going into investing, not someone else’s pockets. For ETF providers, it’s driving competition – and that’s good for investors. For mutual fund providers with fees as high as 2 per cent or more on some funds, it’s threatening to disrupt and end their whole way of doing business.  

How will the emergence of artificial intelligence impact the fund industry globally?

The impact of artificial intelligence on the investment industry has just begun – the disruptions from algorithmic trading to robo-advisors are just a taste of what’s to come in the near future.

That said, I don’t think we’ll ever see a purely A.I. driven investment industry, as there will always be a need by some for a certain level of human touch. Money is a very personal thing and some investors want to be able to work with someone who understands their unique circumstances. As well, we can’t underestimate the power of the human factor in choosing investments; there are many good portfolio managers and asset management firms that continue to do very well managing active assets.

Indian mutual funds have seen sizeable inflows in the past few years, buoyed by monthly systematic investment plans. What changes do you foresee for the industry as it grows in size?

The Indian market is still a few years behind the global trends in investment we discussed earlier. No matter the growth to the mutual fund market, the growth of ETFs will undoubtedly threaten to disrupt their complacency. In the future, I think we’ll see investment plans and programmes favour ETFs because of their lower costs, transparency, liquidity and ease of trading. I think that’s true for India as well. 

Unlike developed markets, active investing still dominates in India. How long before the scales tip to passive investing in India? What will be the key factors driving this?

One of the largest demographic drivers of passive investing are typically self-directed investors and more initiatives that we see driven by regulators and the capital markets themselves will play a key role in building that momentum. Education and increasing the ability for investors to open personal trading accounts are just two initiatives that are needed. In addition, once organizations and investors become more aware of how important fees are to overall returns, passive investing through ETFs will become a much more accepted route for gaining exposure to the market instead of their higher mutual fund counterparts.