Isabela: 2025 was a year defined by tension, elevated uncertainty, tariff disputes and the rise of unstoppable AI. Yet through it all, ETFs continue to evolve as we head into 2026. Investors are asking what's next for ETFs and today's episode, we're breaking down the three ETF themes that could define the year ahead, plus a special bonus theme at the end.
So stick around. Joining me today is Damian Fernandes, managing director and portfolio manager at TD Asset Management. Welcome, Damian. How are you doing?
Damian: Thanks, Isabella. I'm feeling great.
Isabela: All right. Excited to get started. I mean, since you're feeling great, we might as well just jump right into it. So the first theme is actually around the return of core portfolios. There are currently over 1800 ETFs that are active here in Canada, and just under half of those ETFs are actually passive solutions. So they're their core solutions that track an index.
And in a way, we can think of this as the original ETF category, and it's very widely used by many investors. So why do you think core ETFs will be an important theme for 2026?
Damian: Well, I think 2025 has been a year with a lot of volatility. Right. You initially started the year with the enthusiasm around, you know, Make America Great Again. And then we had the trade, you know, the trade tensions and then we had a A.I. and we had a whole bunch of issues that led to gyrations in the market.
But if you look at core portfolios and just think about, you know, like a traditional asset allocation portfolio, fixed income and equities, that's done pretty well this year and it's gotten you through that whole segment of volatility without much indigestion. And I think that's what people like, like right now, where the midst of a transformational technology change in AI people are talking about semiconductors and power usage and all these exciting things.
But let's not forget that, you know, the idea of balance and what you really need to start off with is like, it's great to have these optionalities and these really great cyclical themes, but they can't be all your portfolio, the portfolio construction, right? Like making sure you are able to withstand these gyrations and reduce your volatility is a balanced mix of core portfolios, core equity plus core fixed income portfolios.
They should be foundational pieces in your asset allocation. And then, you know, you add on to like the the exciting stuff to it. But I think what will happen in 2026 is that investors and I hope they do will will slowly move back towards, you know, core solutions for equity exposure and fixed income exposure and then decide to add the frills, the excitement around the edges.
Isabela: So it's kind of like make boring great again.
Damian: Make boring great again. Exactly.
Isabela: Also, okay, so we've covered the boring part of our ETF portfolio, but I don't know about you. I like to have some excitement in my portfolio, especially with the longer time horizon. So actually, did you know that over 60% of ETF launches this year in Canada were actually active ETFs? So active ETFs can be that exciting component part of our portfolio.
And how would you think like how should investors be positioning active ETFs in their portfolio?
Damian: I love that question. And to be clear, like I wasn't advocating being boring, you need excitement. And I think active management brings that. And to be clear, right, the first thing anyone should look at when deciding on active management is a track record of the active ETF they're looking at. We talked about we started this conversation talking about core portfolios, right?
That's your foundational pieces. You know, you're you're building blocks and then you want to add the excitement. We're having some active exposures, but then that but like just before you look into that, you should actually look at the components of how that active ETF is constructed, who the management team is, their track record in generating alpha outperformance and so forth for us, like how how should we think about this?
I would think about this and two things. I would look at the historical track record of the active ETFs you're looking to explore and invest in and see whether that is what you want it to do is you want it to be additive to a core portfolio like you shouldn't have. You shouldn't be doubling up on exposure in the active ETF choosing.
And then secondly, I'd look for gaps in my core portfolio, right? Maybe you know, my core portfolio and I'm just, you know, thinking about is traditionally very Canadian centric and I have core Canadian centric portfolios now. I don't get the exciting stuff like AI or, you know, energy transition or these new themes that are that like I don't get that in my core portfolio.
So maybe I want to use my active component, my active share to introduce components in my core portfolio that I can’t find there. So they like that. Well, just to sum it up, I think you'd look at the management track record of the active ETF. You're looking at, you're looking to invest in how it's done. And then secondly, look for places where within your core exposure, you don't have to you don't have that expulsion in your active and use the active component to actually bridge that gap.
Isabela: Do you think there's like a balance that you should have between active and passive ETFs?
Damian: I since I'm an active manager, I'd say selfishly should be all active. But to be clear, I don't. I think whatever works for you, I mean this genuinely right? Each investors outcomes is is very personal and is very like it's determined on their own risk profile. I'm very comfortable in active ETFs because we've had a track record of generating performance through a process.
But maybe some investors might just want a passive solution because they, they feel that, you know, the, the that, that better suits their needs. I would think of I think starting off probably a 50-50 mix, if I'm not not knowing anything else but then move around that based on your objective functions.
Isabela: Yeah, but figure out what works best for you and especially in the new year, like 2026, why not play around with that mix and see first evaluate how 2025 went for you and what you want to change for 2026, right?
Damian: Exactly
Isabela: Awesome. So moving on to our final theme. As rate cuts loom, investors rethink how to earn, yield and manage risk. So what are some points that we should be thinking about when it comes to balancing ETFs that provide income, but also wanting our initial investment to appreciate?
Damian: Yeah, we think about this as as just like people view income and growth in two different buckets for some reason. I'm not sure why. Like you can have you can have your cake and eat it too, right? I like that. And so for us, I think about like, let's not sacrifice income for growth. TD Asset Management has a lot of products that can actually help achieve this.
But just broadly, when you think about which how you started off your question, rate cuts in the US are coming, there's going to be at least three rate cuts next year. In Canada, we've just had rate cuts. It's not as easy to earn and I and many of many investors actually have income needs. It's not as easy to satisfy those income needs now just from a traditional, you know, high dividend portfolio, because to be clear or a high income portfolio, the rates are low, rates are being pulled lower and that's pulling the yield or so what you should be looking at is how can we find the best of both worlds, Right?
Can we find enhanced ETFs that that are able to provide some sort of income, but while also providing you participation in the equity markets, can we find can we focus on dividend growth or income growth? Right. People always, people always look at high yields, but I almost think like high yields are like a certain degree when you're, you know, we're about to start into like Christmas season.
It's like the shopping season and you see sale signs. Things are on sale for a reason, right? Like high yields, like the artificially high yields are probably, you know, covering up something else where you're not getting the growth aspect. So you should probably be looking for both. You should be looking for for us, for me, income that's growing over time, but also allow some participation in the equity market.
Isabela: Absolutely. So if you're seeing like double digit yield returns, maybe you should take a closer look also to see what's actually going on with that investment.
Damian: Just by that. I know. Just think about that. Right. If someone's giving you double digit returns, income returns, they're probably eating away at your capital. The returning capital back to you. Right. It's called return of capital. Kind of like, you know, the the the sale item in this you know, in the bin in the back of the store.
Yeah. Chances are it's like a dodgy like product to begin with.
Isabela: May one wanted that stuff that's why that's so.
Damian: Maybe anyway that's that's yeah. So I would say I'm actually feel very strongly about that though you know really high artificial yields that masquerade that mask .. Sorry about a return of capital. So what you're really paying for is to get your it's actually drawing down the capital. You invested it to make that yield and like that's that I would rather have you receive a yield that's growing over time and some participation in the equity market.
Isabela: You can have both.
Damian: You can have both the cake and eat it too.
Isabela: Perfect. So now I did promise our listeners a bonus, surprise theme, and that's actually around the comeback of global diversification. So, many investors are now actually looking outside of North America when it comes to their ETF investments. What would you say is behind the shift and do you think this is going to continue?
Damian: Yeah, that's that's such a like we could have a full podcast just talking about that question but the move towards global equities and global outperformance, I think it's I don't think it's a cyclical move. I think it's actually a secular move and it actually can trace its steps down to, you know, Donald Trump's own actions, right? When when Donald Trump in antagonizing other countries through trade and tariffs, what they what he's really done is forces other countries to take corrective measures to improve their own outcomes, improve their own economic growth.
So, you know, whether it's Canada or Europe or China, they've all made changes to domestic policies to improve long run growth. Perversely, in Making America Great Again, the Donald Trump has made global equities great again, right? And because what's actually happened is that those countries and those that are outside of the US have now taken policies to improve their trend growth, which it's no surprise that, you know, Japan is up 30% on the year and China is out like a lot of these countries that that have been in the crosshairs of the most of Donald Trump's trade antagonism have actually outperformed the US.
Yeah. So I think you know, I think and this is something for 2020 like you know I think it's a great bonus question because for 2026 investors have to think like the US has, you know, has just pulled in all this capital. But there's opportunity globally and I think you should look at exploring that.
Isabela: So diversify, diversify, diversify.
Damian: Exactly.
Isabela: Awesome. Okay. Although we don't know what curveballs 2026 will throw our way, the themes we chatted about today will be important to consider when investing in ETFs from making Boring Great again to adding a bit of spice into your portfolio with active ETFs and global ETFs, these steps can really help prepare you for the year ahead and be well positioned.
Thank you for listening to today's episode and as always, stay curious, stay informed and stay invested.
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