The application of ETF layers within an investment mandate or portfolio can be a powerful tool to allow active managers to focus more time on what they do best – security selection. When markets are volatile, however, single securities trade ideas can take longer to establish positions and to realize their return potential. This is where ETFs can offer solutions.

Liquidity Sleeve: When investors get nervous, their first thought is often to seek safety in the form of cash. Institutional Portfolio Managers seek to minimize cash as it can represent a drag on the performance of the overall portfolio. However, to support clients who need to redeem, a minimum level of cash is required. 

Beta Exposure: Traditional Index ETFs, including fixed income and equity, can be used to deploy that cash along similar mandates to the overall fund. This allows the cash to track the nearest suitable beta benchmark, leaving the active manager free to focus on their alpha generating ideas. 

Sleeve Size: Depending on the fund, an ETF liquidity sleeve could range from 2-10% of the fund’s AUM, typically sitting at the 5% level. While overall use of ETFs within a portfolio can be substantially higher, the sleeve is intended to focus on products that stand ready to be sold for cash or to be switched into a more attractive investment opportunity, when one appears amidst the volatility. Institutional users of ETFs, including investment teams at Mackenzie Investments, often consider trading via end of day NAV; block trading with ETF Market Making desks; and, of course, adding or trimming to ETF positions through secondary market trading (the ET in ETFs) on the TSX and NEO exchanges.