How a new generation of active ETFs is reshaping portfolios

The ‘rising-tide-lifts-all-boats’ conditions that drove the growth of passive exchange-traded funds (ETFs) for more than two decades have waned. Today, advisors are navigating markets that are increasingly tied to the fortunes of artificial intelligence and rising bond yields amid persistently high inflation.

“There are limits to the benefits of passive ETFs in this market environment,” says Robert Wernic, head of Investment Specialists at Manulife Investments.

Much of that boils down to how passive equity ETFs weight their holdings. He explains that passive equity ETFs are typically market-cap weighted, meaning they tend to be very top heavy and leave little room for diversification within one’s portfolio.

“In the U.S, we see large technology firms heavily invested in AI’s future profitability dominate the index, whereas in Canada, the major banks take up the lion’s share of the S&P/TSX Composite Index.”

Meanwhile, passive fixed-income ETFs present a different shortcoming in their design, as their holdings are debt weighted. That means the governments or corporations that have issued the most amount of debt find themselves with the heaviest weights in the index – “not exactly the most optimal investment strategy,” Mr. Wernic says.

“Advisors are seeking higher-quality allocations at lower price points, which a new generation of active ETFs and all-in-one portfolios can now provide,” says Jordy Chilcott, head of Retail Intermediary Distribution at Manulife Investments.

Costs remain important, he adds, noting that new regulatory changes will shed further light on fees clients pay.

The industry is evolving and a new breed of actively managed ETFs, with fees within a few basis points of passive ETFs, is catching the attention of Canadian advisors.

The Securities and Investment Management Association’s 2025 Annual Statistics Report shows that active ETFs accounted for 50 per cent of the almost $126-billion total in net ETF sales last year in Canada. Today, active ETFs account for more than $200-billion in net assets under management of all ETFs, up from about $30-billion in 2018.

By adding actively managed ETFs to portfolios, advisors can help their clients manage risk, uncover opportunities that broad benchmarks might miss. Moreover, in the face of pressures from the implementation of total cost reporting, using active ETFs can help optimize performance and be a competitive edge.

The actively managed ETF landscape is diverse with a spectrum of approaches, says Mark Bankay, head of ETFs at Manulife Investments.

“At one end, there are ETFs that may track an index that’s not market-cap weighted – for example, an index that may weight all securities equally. Or they may emphasize single factors such as value, quality or momentum. At the other end are more fundamental-driven funds guided by managers, doing the deep dive-research on individual securities.”

In between these two approaches, another type of active ETF is growing in popularity. It employs factor-based construction while using systematic, quantitative strategies to provide greater focus on factors and underlying securities with a higher probability of outperforming.

Central to the success of many of these active ETFs today is the ability to exploit these factors in a systematic way. That allows for active exposures at fee costs comparable to passive products, Mr. Bankay says.

“Manulife is at the forefront of this trend, offering the entire active ETF spectrum, culminating with all-in-one portfolio ETFs that offer the best of our systematic, multi-factor and fundamental strategies.”

He points to Manulife Conservative ETF Portfolio MCAP, Manulife Balanced ETF Portfolio MBAP and Manulife Growth ETF Portfolio MGAP, all of which charge 0.35 per cent management fees.

As an extension to the all-in-one suite, Manulife recently launched global all-equity and all-fixed income solutions. Manulife All-Equity ETF Portfolio MEQP is actively managed, with the flexibility to tactically adjust positioning and capture opportunities as market conditions evolve. Manulife All-Fixed Income ETF Portfolio MBND is designed to provide diversified core bond exposure, while maintaining a disciplined approach to risk management and income generation.

These portfolio solutions can be a strong entry point, Mr. Bankay says. They’re built to provide core exposures at a low cost while seeking to generate risk-adjusted alpha, allowing advisors to focus on other value-add services for clients.

Key building blocks to these portfolios are Manulife’s Smart ETF lineup, which are “built from the bottom up” blending active management with a systematic quantitative approach, Mr. Wernic says.

For example, Manulife Smart International ETF IDIV.B focuses on companies that have the potential to pay a consistent and growing dividend over time. It’s Canada’s 15^th bestselling ETF this year, according to National Bank’s ETF flows report¹, demonstrating how the product is resonating with investors and advisors.

Central to Manulife’s philosophy for its actively managed lineup is flexibility as opposed to “dogmatic” adherence to a single strategy, Mr. Chilcott says. “Our approach is driven by continually learning and evolving portfolio construction.”

For example, Manulife’s research shows that the best use of a quality factor for enhanced performance is identifying low-quality stocks and eliminating them from the index rather than trying to screen only for high-quality stocks. The result is diversified exposures at a low cost, supported by truly active management that can evolve over time to changing market conditions.

“At Manulife, it’s our core belief that a ‘set and forget’ [approach] won’t perform as well as a strategy that adapts with new information and tactically adjusts, seizing on opportunities while navigating risks in advance of broader market behaviour that often drives volatility,” Mr. Chilcott says.

Advertising feature produced by Globe Content Studio with Manulife Investment Management. The Globe’s editorial department was not involved.