The growth potential of the exchange-traded fund (ETF) industry is attracting the interest of new product providers, ranging from the behemoths of the financial services sector to smaller niche players.
The club of product providers will soon number 15, with Mackenzie Financial Corp.’s family of ETFs about to launch. Among the smaller, relatively new entrants are Auspice Capital Advisors Ltd. of Calgary, Lysander Funds Ltd. of Richmond Hill, Ont., and Questrade Financial Group Inc. and Hamilton Capital Partners Inc., both of Toronto. The latest newcomer, Sphere Investment Management Inc. of Toronto, has filed a preliminary prospectus for five ETFs.
“We’re in the era of the great ETF land grab,” says Chris Davis, director of manager research at Morningstar Canada in Toronto. “Providers are trying to take advantage of the rising demand.”
Mackenzie, which is launching a family of actively managed ETFs, joins other mutual fund giants eyeing the opportunity to expand their product lineups. Toronto-based CI Financial Corp. (CI) recently snapped up First Asset Investment Management Inc. of Toronto, and AGF Management Ltd. of Toronto acquired Boston-based ETF manager FFCM LLC, portfolio manager of alternative strategy and smart beta ETFs.
Impact of fees
These expansionary moves will strengthen the fund companies’ penetration as fee-based advisors look for low-cost products at a time when the regulatory focus is on greater fee disclosure and clients are becoming more conscious of the impact of fees on their portfolios’ returns.
“We’re big believers in the benefits of professionally managed money,” says Stephen MacPhail, president and CEO at CI. “We believe in creating choice for clients, whether that’s in investment style or product vehicle.”
Other big financial services institutions could be preparing to join the club, including Manulife Financial Corp. (its U.S.-based affiliate John Hancock Financial Services Inc. launched a U.S.-based family of ETFs in 2015) or Toronto- based Franklin Templeton Investment Corp. (its parent company, U.S.-based Franklin Resources Inc., has spawned an ETF family south of the border). Franklin Resources has been staffing its U.S.-based ETF team with a handful of former senior employees from the U.S.-based iShares division of BlackRock Inc.
“Every mutual fund company or asset manager is seriously discussing ETFs around the conference room table, and it’s a compelling avenue of exploration,” says Daniel Straus, director of ETF research and strategy at National Bank Financial Ltd. in Toronto. “ETFs can be less costly than mutual funds to list and maintain, and the lower cost hurdle adds to the ability of an active strategy within an ETF to outperform the market.”
The expansion in providers and products is leading to cost competition, as well as creativity and niche exploration, when developing differentiated ETF investment strategies.
Mackenzie’s new family of ETFs will include Mackenzie Core Plus Global Fixed Income ETF, Mackenzie Unconstrained Bond ETF, Mackenzie Floating Rate Income ETF and Mackenzie Core Plus Canadian Fixed Income ETF. All ETFs in this initial foray are in the fixed-income category. The intention of the Mackenzie’s ETF family is to “deliver [the company’s] active management expertise to a larger audience,” said Jeff Carney, Mackenzie’s president and CEO, in a November, 2015 statement. (Carney is to become president and CEO of IGM Financial Inc., Mackenzie’s parent firm, on May 6.)
TD Asset Management Inc. of Toronto is taking a different tack with its new family of six passive ETFs. Based on broad market indices, they include TD Canadian Aggregate Bond Index ETF, TD International Equity ETF, TD S&P 500 Index ETF, and TD S&P/TSX Capped Composite ETF. The international and U.S. equity ETFs are also available in currency-hedged versions.
TD’s ETFs should benefit from the banks’s massive branch distribution network and the strength of its brand loyalty. TD originally was out in front of the other banks, launching a family of ETFs in 2001, but closed down those funds in 2006 due to lagging asset growth and weak trading volume. That effort was a case of bad timing; TD suffered from being a tad too early. The ETF industry began to pick up rapidly in Canada shortly after TD it exited the scene, and the bank now must play catch-up.
Specific areas of expertise
“Financial intermediaries can’t just stand back and watch the powerful ETF revolution unfold without participating in it,” says Yves Rebetez, managing director of ETF Insight Inc., a Toronto-based research and consulting firm.
Rather than launching entire ETF families, some smaller industry players are focusing their ETFs on specific areas of expertise. For example, Lysander launched Lysander-Slater Preferred Share ActivETF in 2015. And Hamilton Capital has introduced Hamilton Capital Global Bank ETF, while Hamilton Global Financials Yield ETF is in the final prospectus stage. Sphere Investment plans five yield-oriented ETFs with various geographical exposures, including Asia, Canada, Europe, U.S. and emerging markets.
“ETFs offer clients on-demand liquidity and lower [management expense ratios. ETFs] are growing fast for good reasons,” says Rob Wessel, managing partner of Hamilton Capital. “The market environment – whether you’re talking regulatory, pricing or disclosure – is moving in a direction that favors ETFs, and we want to participate.”
CI, the largest independent mutual fund provider in Canada, moved decisively into ETFs by purchasing First Asset and its $3 billion in assets under management (AUM) in 2015. First Asset continues to operate as an independent subsidiary under the CI umbrella. Its lineup includes 48 actively managed and “strategic beta” ETFs, delivering strategies that go beyond basic ETFs based on broad market indices.
Some of CI’s active portfolio managers will become available through the ETF structure. As a first move, First Asset is in the process of converting one of its existing closed-end funds into an actively managed ETF focused on the global financial services sector. That new ETF will be overseen by CI’s Signature portfolio-management team.
The largest ETF provider remains the original pioneer in the Canadian industry, BlackRock Canada Asset Management Ltd.’s iShares division. Leadership is shifting, however. In 2015, BlackRock saw year-over-year AUM growth of 1.4% to $46.9 billion, while its closest competitors closed the gap: BMO Global Asset Management Inc.’s AUM grew by 29% to $24.2 billion; Vanguard Investments Canada Inc.’s, by 79% to $6.6 billion; First Asset’s, by 61% to $1.9 billion; Purpose Investments Inc.’s, by 78% to $845 million; and RBC Asset Management Inc.’s, by 106% to $758 million.
“The dominance and success of BlackRock has attracted competitors,” says Davis. “It has the longest track record in the ETF industry, but the pie is being shared now.”
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