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  5. ZQQ: I am beginning to shift out of specific technology stocks and into technology ETFs simply out of personal preference from a diversification and risk allocation perspective. [BMO Nasdaq 100 Equity Hedged To CAD Index ETF]
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Q: I am beginning to shift out of specific technology stocks and into technology ETFs simply out of personal preference from a diversification and risk allocation perspective. I presently own EARK and read with great interest the Morningstar article you posted last week (No Room for ARK) which presented some other perspectives on the ARK funds in general (going forward) including some of the challenges very successful actively managed technology funds eventually face when they become so large. Which brings me to a few questions. 1. Do some of the go forward challenges the US ARK funds may encounter also apply to the much smaller Canadian versions offered through Emerge, such as EARK? 2. Can you comment generally on technology ETF alternatives such as ZQQ or TEC? I am interested in particular about understanding the comparison of a more actively managed technology focused ETF vs. a more passive index tracking ETF or one (like TEC) that seems to be a hybrid in that it tracks an index but periodically rebalances. This can all be a bit confusing so any general explanations of pros/cons would help immensely. Thanks.

Asked by Brad on March 26, 2021
5i Research Answer:

1) Some may apply and some may not. Emerge funds are much smaller in size (compared to ARK funds) and therefore might not experience the volume-related challenges mentioned such as adding or selling positions, taking on more large-cap positions vs growth, and capacity management. We think Emerge funds have a lot more flexibility compared to ARK funds. This is not to say some of the risks might not be mirrored, such as high momentum stocks seeing higher volatility or difficulty to sustain high returns.

2) Active management: As the term says it, the portfolio is actively managed through security selection, rebalancing, and asset allocation by a portfolio manager who tries to outperform an index, other managers, or the broad market. Passive investing usually involves less buying and selling as the fund follows an index and rebalances periodically to reduce tracking error between the fund and the index. Both have pros and cons depending on the funds one selects. Passive funds may see a larger $$ inflow compared to actively managed funds and have generally performed well over longer time frames. They are generally much cheaper. With active funds, like mutual funds, some managers are worth paying for, but over time, due to fees, the number of good active funds becomes fairly small. We think active management is a bit more useful in bonds, where managers can adjust positions quickly based on yield curve movements and expectations, and overall liquidity is better.