ETFs have evolved far beyond the simple, passive, index-tracking investments they were a decade ago. Now, thanks to the rise of actively managed ETFs, these investments can be significantly more complex, offering access to multiple asset classes and to layers of investment strategies designed to beat the overall market.
This shift can make for a confusing landscape, especially for traditional mutual fund-licensed financial advisors interested in dipping their toes into the ETF marketplace on behalf of their clients. Although passive ETFs are comparatively straightforward and easy to explain to clients, many ETFs now incorporate various degrees of active management - smart beta to factor-based to fully discretionary - and are more challenging to analyze, trade and place in client portfolios.
Many advisors are comfortable rolling up their sleeves and delving into the nitty-gritty of ETFs. However, there is a learning curve for other advisors who are not as familiar with the products, says Christopher Doll, vice president, product and business strategy, PowerShares Canada, a division of Invesco Canada Ltd. of Toronto: "There's a lot of education that's still needed."
The good news is that there are many helping hands for advisors. The Canadian ETF Association (CETFA), for example, is committed to helping advisors understand ETFs better, says Pat Dunwoody, CETFA's executive director.
Dunwoody says that the association's website will be relaunched this summer as a one-stop shop for those interested in learning more about ETFs. "I want to have the site designed such that you can go there," she says, "and, within a few clicks, you get the answer or you're forwarded to a website that has the answer."
She adds that CETFA will be working with ETF providers to ensure that CETFA website's users can access the best information available. The plan is to also provide webinars, in conjunction with the Toronto Stock Exchange, which will be posted to respond to changes in the ETF market as they happen, Dunwoody says.
Invesco, for its part, has a dedicated capital-markets specialist who's available to help advisors with the intricacies of ETF market trading - understanding the bid/ask spread, for example, and liquidity in the ETF marketplace.
Doll says that some advisors also may need more assistance in understanding an ETF's underlying strategy: its merit; how to use it; and when investing in it makes sense, given various economic drivers. As well, many ETF providers offer extensive support in this area to advisors through seminars, websites or individual consultations.
Doll notes that some of the more esoteric ETFs are not always easy to explain at a client's level of understanding. He notes that client comprehension is top of mind at Invesco, even in the product-development stage: "If I can't pitch [an ETF's concept] to my mother, how am I going to pitch it to an advisor, who then has to turn around and pitch it to a client?"
Michael Cooke, senior vice president and head of ETFs, with Toronto-based Mackenzie Financial Corp., says there may be a bit more homework required by advisors before adding these investments to client portfolios, but the effort is well worth it. A good place to begin is online, he says. Mackenzie launched its stable of ETFs last year, and the company's website offers portfolio-level metrics normally associated with more traditional mutual funds, which helps advisors compare investment vehicles. Mackenzie also added ETF training to its cross-country due-diligence sessions with advisors, Cooke adds.
Jeff Lucyk, senior vice president and head of retail sales, with Horizons ETF Management (Canada) Inc., says advisors tend to get the bulk of their ETF information from the large ETF providers. Horizons offers advisor firms "ETF 101" presentations, which provide a rudimentary review of what advisors should understand before investing in the ETF space. The plan is to add an "ETF 201" presentation for those who wish to dig deeper into advanced ETF topics, he adds.
Given that ETFs trade on stock exchanges, uptake by advisors licenced by the Mutual Fund Dealers Association of Canada (MFDA) has been limited. For MFDA-registered firms, the difficulty is that they need access to stock exchanges to buy and sell ETFs - and this means making an arrangement with an Investment Industry Regulatory Organization of Canada (IIROC) firm registered to trade securities. So far, only two fund dealers have made back-office arrangements with an IIROC firm in order to offer ETFs.
Mutual fund dealers offering ETFs also will have to address new proficiency requirements expected for their reps.
The MFDA is awaiting approval from the Canadian Securities Administrators (CSA) on proposed ETF proficiency requirements for advisors, including education and other qualifications. CETFA has been working with education services providers to help develop online and classroom courses on ETFs, which could form part of the proficiency requirements. Until those requirements are approved by the CSA, fund dealers' reps must pass the Canadian Securities Course in order to offer ETFs.
"We're excited about the MFDA looking to add continuing education to its mandate," Dunwoody says, "because the ETF industry is changing so quickly and new products are coming on the market so quickly. This will give us one more avenue to get information out to advisors."
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