Toronto-based FT Portfolios Canada Co. (First Trust Canada), a relatively new entrant in the Canadian market for exchange-traded funds (ETFs), is betting that the expertise of its U.S. parent will pay big dividends as the Canadian firm builds its presence in this country. First Trust Canada, an affiliate of First Trust Portfolio LP of Chicago, is looking to grab a piece of the young but rapidly growing Canadian ETF market.
Canada’s market, although still relatively small, is growing almost four times faster than the U.S. ETF market and has tremendous scope for further expansion, says Karl Cheong, head of ETFs at First Trust Canada. Observes Cheong: “[Canada] is still years behind the U.S. in terms of adoption and familiarity with ETFs.”
And Cheong says his firm is not worried about homegrown competition. The number of ETF providers in Canada (15, assuming Mackenzie Financial Corp. launches ETFs as expected) could increase if more major banks and mutual fund companies take the plunge. Cheong views this growth as a positive development for experienced participants such as First Trust Canada, which has launched 17 ETFs since entering the Canadian market in 2013.
“New entrants will provide a fresh gust of wind that will fuel ETF growth,” he says. “Firms will be talking to advisors and investors about the value and benefits of ETFs. That will accelerate growth [of ETFs], mostly at the expense of high-cost mutual funds.”
First Trust Canada aims to leverage the experience, financial strength, supplier relationships, research and resources of its U.S.-based parent to support expansion in Canada, says Cheong. As the sixth-largest player in U.S. , Cheong says, the U.S. parent firm has seen its ETF assets grow almost fivefold in recent years – to more than US$11 billion in assets under management (AUM) in 2015.
Deep pockets
First Trust Canada, in leveraging its U.S. parent’s experience, has a strategic operational advantage, Cheong says. The Canadian firm also benefits from something that many newer market entrants lack – access to strong capital reserves. Those deep pockets also are being used to drive expansion in Europe and Latin America, although, Cheong says, Canada remains a favoured market.
First Trust Canada still is relatively small. The firm represents less than one-half of 1% of total market share of the $89-billion Canadian ETF market, which is dominated by two product providers: BlackRock Asset Management Canada Ltd. and BMO Global Asset Management Inc., which together control 80% of the market. As of the end of February 2016, First Trust Canada’s AUM was $283 million.
But Cheong’s firm is here for the long term, he says: “The relationships we are building with the financial advisor community are starting to gain momentum, but it will take time to have a more significant impact. To be successful in Canada, you must have patience.”
Relationships and word of mouth among advisors, rather than among investors, are the firm’s preferred methods of developing its business. That translates into little advertising. In the U.S., Cheong says, “First Trust is the firm that everyone knows, but no one knows.” It hopes to be successful in Canada with the same approach, he says.
One of First Trust Canada’s competitive advantages, Cheong says, is that the firm uses a proprietary method for assessing the value of potential investment choices, AlphaDEX. That system assesses the value of potential investments by tracking third-party securities market indices. This methodology has an established record at First Trust Canada’s parent company that fund managers at the Canadian subsidiary can rely on, Cheong says.
In Cheong’s view, the use of AlphaDEX gives First Trust Canada a unique profile. The firm’s competition in Canada, including the anticipated influx of new entrants, is likely to rely on the same market indices, he says – for example, the MSCI world or S&P/TSX composite index – which will have the effect of making competitors’ products look very similar with few distinguishing features. Says Cheong: “This will create confusion among investors as to which product to choose.”
A deliberate strategy
First Trust Canada, on the other hand, Cheong says, will be launching products that are different from its Canadian competitors. “Plus,” he adds, “We will not have to compete on cost.”
Perhaps not surprising, the ETFs offered by First Trust Canada have a strong concentration on U.S. sector-focused funds. That is a deliberate strategy by the firm to launch distinctive products using AlphaDEX. The aim is to add value over and above products offered by other firms, Cheong says.
First Trust Canada also is looking to create a “first in the field” advantage, Cheong adds: “By being first to market with a product, you tend to generate the lion’s share of fund flows in the category, and it is often difficult to displace an incumbent player.”
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