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As Canada announces the legalization of marijuana for recreational use, Steve Hawkins, president and co-CEO of Horizons ETF Management Canada Inc. − which launched the world’s first cannabis exchange-traded fund last year − answers 10 questions posed at the Inside ETFs conference on Thursday in Montreal by Inside ETFs CEO John Swolfs.

What makes your firm differ from all other ETF providers?

We don’t want to sit still, and we like to lead the way when it comes to new products. Everyone is talking about the changes in commodity pools, and we launched hedge fund ETFs six years ago in 2012. We launched the first global marijuana ETF and just filed for a leveraged marijuana ETF. Pushing the boundaries in this market is very important.

What makes the Canadian market different from the rest of the global ETF market?

The single-biggest thing is distribution. Canada’s ETFs are sold, not bought, so you have to have a strong team of professionals behind you. Canada is very home-centric when it comes to investors, more so than any other country in the world. You have to feed the demands of your clients.

Our regulations are also very different, and our regulators are very forward-thinking – moreso than the American regulators who I believe are years away in making progress in the sale of active ETFs. Our regulators understood right from the beginning that we are not disadvantaging our clients; we have a forward-looking marketplace in that regard.

Why has Canada embraced the active ETF?

Canadians grew up with mutual funds. That is where our investing history has been, and it has always centred around active management, and it has been about the generation of alpha, so beta is really a new concept for Canada in that regard. So it was very easy for us to transition our strategy from pure beta (passive investing) to bring active management to Canada. There are a lot of different asset classes that we see, especially in our home-centric fixed-income funds where active management provides a clear benefit to the end client.

We entered the active ETF space in 2009 … and we believe there is going to be continued demand in this area. More than 50 per cent of the ETFs being launched right now are actively managed.

Many of the big banks have or are entering the ETF space – what does this mean for the industry?

The banks control distribution first and foremost. They have these huge distribution networks – and not only the banks but also the large mutual fund players in our industry. At some point we are going to see every single bank enter the ETF business, whether it’s by acquisition, by partnership or organically themselves. The biggest risk to us as an independent ETF provider is distribution. If the banks close that distribution network, that would be a problem. It is really nice, from a regulatory standpoint, that the regulators are trying to keep that open architecture and level playing field – unlike the U.S market. But ultimately the banks are going to take over the world. They always do, and there is nothing we can really do about that.

We are currently in a strong No. 4 spot in terms of ETF assets in Canada, but I see that quickly changing with some of the banks ramping up their ETF businesses. On a positive note, they will help grow the ETF business overall and bring a lot more awareness to the product instead of just selling mutual fund wrappers all day long, which is what they do now.

Will ETFs overtake mutual funds?

ETFs are going to be a significant investment tool going forward, but they will not take over mutual funds as long as the banks keep selling them.

Let’s talk about [marijuana] – Why has the Horizons Marijuana Life Sciences Index ETF (HMMJ) been a such a big hit while other cannibals ETFs have struggled?

HMMJ was the world’s first marijuana ETF and got significant worldwide attention, and we have [had] huge trading volumes in this ETF from day one, creating huge liquid access to this sector. First-mover advantage was huge in this space. Americans are buying our ETF, Canadians are buying our ETF and institutions are buying our ETF.

How do you see the recent legalization in marijuana benefiting your ETF?

Well we saw a nice 4-per-cent jump in marijuana stocks yesterday, so that is good. We have been expecting this for quite a while, and it is one of the reasons we started to think about launching this product. With the change in legislation, it really just legitimizes the entire sector and opens the eyes to the rest of the world as the second country that has legalized recreational marijuana … the United States is already there on an individual state-by-state basis.

When it comes to investing in innovation, should thematic ETFs be active or passive?

I believe there is room for both, and it really depends on the newness of the sector and how well established are the companies themselves. The traditional analysis of qualitative and quantitative that goes into stock picking is, from my perspective, gone. The trend is really going towards themes and asset classes. Asset allocation is really the way to generate alpha. In that regard, certain themes such as the marijuana sector − it was brand new, and when we launched the fund there was only 14 companies, and now there are over 30 in the index. We have now seen active marijuana funds emerge, and one has seen a bit of performance, and the other has seen significant under-performance. You are making bets, decisions on companies that no one has traditionally analyzed from a sector perspective, so when you are dealing with emerging sectors, I think it’s important to be on the passive side of things, and when you are dealing with more established sectors – like the robotics sectors – then active players can really outperform the passive players in those areas.

Outside of marijuana, what is your favourite theme for 2018?

I really like artificial-intelligence-driven strategies. I think it’s a new and exciting theme that will have a lot of AI-driven investment products emerging soon. But technology generally is going to be a theme this year.

Will robo technology make advisers become extinct?

I don’t believe “robo” is to investment advisers as ETFs have been to mutual funds. Robo is new technology, and there will always be a place for it, but Canada has always been an investment-adviser-driven community. For the wealth-management industry generally, investment advisers are not going away, and this is a marketplace where people like to ask questions, they need tax advice and they like the comfort of having someone to hold their hands to ride the ups and down of the market.

This interview has been edited and condensed.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 3:59pm EDT.

SymbolName% changeLast
HMMJ-T
Horizons Marijuana Life Sciences ETF
-1.87%10.99

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