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Selecting ETF winners for Morningstar Investment Awards

Ashley Redmond

Ashley Redmond: I’m Ashley Redmond for and I’m here with Pat Chiefalo, Director of ETF Research & Strategy for National Bank.

Pat, thanks so much for joining me.

Pat Chiefalo: Thanks for having me.

Redmond: Pat is on our ETF jury for this year’s Morningstar Awards, which are being held November 27 at the Fairmont Royal York right here in Toronto. So, Pat, since you’re so intimately involved in the process, maybe you can touch on each ETF and tell me a little bit about it.

Chiefalo: Sure. So on the equity category side, that was an interesting one this year. So Canada [has] had some challenges in the global marketplace with respect to commodities. We’ve had certain commodities that have had a tougher time this year. So a lot of the nominees that have come into the category were more alternative beta that strive to change the traditional equity portfolio exposure versus more traditional market cap-weighted exposures. Also you had a lot of U.S. and international candidates lobbed in as well, given the performance of those markets.

Redmond: Okay. What about specialty ETF?

Chiefalo: So specialty ETF, a much smaller group, a much smaller group of ETFs and for those exposures. I think that’s an important category that will certainly grow over time. But right now it’s still very limited choices, but we had some great ETFs that we submit and we think did really well this year.

Redmond: Okay. A category I’m definitely interested in is fixed income.

Chiefalo: Fixed income, right; another interesting one. Because of the rising rates this year, a lot of the broad fixed income ETFs also had a tougher time managing those rate increases. So this year you saw a lot of short-term corporate bond-type ETFs being favoured; a lot of floating rate ETFs being favoured. When normally you would look at more – for broader exposure, here the favourites and the candidates were more focused on various parts of the duration curve being very short and very specific parts of the credit curve being closer towards the lower-end credit quality type stuff.

Redmond: Okay. When you guys are selecting the winners, is there a lot of discrepancy between jurors?

Chiefalo: It’s always a good discussion with the jurors. So each juror nominates a group and a bunch of ETFs, then we discuss and kind of pull apart and figure out – what are the advantages and disadvantages? The actual selection process is a great opportunity for us to actually debate with our peers, something we don’t get an opportunity to do in terms of what ETFs worked better, [and what ones] didn’t; [also] the different aspects of ETFs. So in going through that we actually, I hope, all of us come out of this process a little bit better and actually apply better a process to our work.

Redmond: Great. Since ETFs are still fairly new to the marketplace, I want to know; do you think that as an ETF juror you face certain issues that maybe other jurors wouldn’t on a different panel?

Chiefalo: We could. So ETFs are a little bit more of specific investment product, so things like liquidity definitely factor into our selection process; things like performance relative to benchmark in terms of how well the ETF tracked its benchmark and not necessarily on the alpha components. Also things like diversification, so how broad the ETF was in covering a specific market? Then, of course, you always look at cost; we want to find sort of the least expensive ETFs for investors to hold.

Redmond: Okay. How long have you been doing this for?

Chiefalo: So I’ve been doing the ETF awards now for about two years; been in the ETF analysis arena now for about four years.

Redmond: Okay. Do you think that the process is fair as a juror when you’re going through and you’re selecting the winner?

Chiefalo: I think because we’re able to submit so many candidates for potential inclusion and then there is a good debate, I think, it’s a great opportunity for us to sort of talk about and work through a lot of the different angles with regards to the ETFs. So I think it’s a great process to work through. There’s always areas where everyone would like to improve and have – whether it’s more categories because there are so many, I think, great products that we always want more categories to include some of those products. There are always tweaks, but I think overall it was a very positive process.

Redmond: Okay. It must feel like a brainstorming session sometimes when you come away from it.

Chiefalo: Yeah, absolutely, and it’s great, again, because you get to discuss back and forth different areas that maybe you didn’t consider or hadn’t looked at before.

Redmond: That’s great. What are you looking forward to for the Morningstar Awards this year?

Chiefalo: So the Morningstar Awards, one of the greatest things about this, the industry is the people, so it’s always great to see the various people at the awards, and catch-up and find out what’s sort of next on people’s agendas.

Redmond: Great. Thanks so much, Pat.

Chiefalo: Thanks so much.

Redmond: We hope to see you November 27 at the Morningstar Investment Awards right here in Toronto.