Canada’s retail investment funds industry is in an era of convergence. More and more often, traditional mutual fund companies offer ETFs; and two leading ETF providers – BlackRock Asset Management Canada Ltd. and Vanguard Investments Canada Inc., both based in Toronto – have created mutual fund families.
This convergence theme is evident among the 33 ETF sponsors the Canadian ETF Association listed as of Oct. 31. Twenty-four of them, or their parent companies, also are active in the mutual fund industry. Their involvement in that space ranges from sponsorship of a single fund to multibillion-dollar mutual fund families.
Long gone are the days when mutual funds and ETFs were two solitudes. Convergence has proven to be a winning growth strategy for the many companies that have embraced both types of retail investment fund structures.
“Traditional [mutual] fund managers viewed ETFs as a threat at the onset of the [ETF] business,” says Mark Raes, vice president, product, with Toronto-based BMO Global Asset Management (BMOGAM), which includes mutual fund arm BMO Investments Inc. and ETF arm BMO Asset Management Inc. (BMOAM). “But the more forward-thinking firms were able to see [ETFs] as an opportunity to enhance mutual fund [offerings], give clients a different way to access portfolios and even interact with different types of clients.”
From modest beginnings in June 2009, when the first four BMOAM ETFs began trading on the Toronto Stock Exchange, the firm now offers 91 ETFs. As of Sept. 30, the firm had $50.4 billion in ETF assets under management (AUM), behind only perennial leader BlackRock Canada’s iShares division, which has $59.5 billion in ETF AUM. To put BMOAM’s ETF market share in context, the combined AUM of the remaining 28 ETF providers were only $2.8 billion greater than BMOAM’s as of Sept. 30.
BlackRock Canada has the competitive advantage of being the Canadian subsidiary of New York-based giant BlackRock Inc., but BMOAM enjoys the home-field advantage of being a subsidiary of one of Canada’s Big Six banks.
More than any other bank-owned ETF operation, BMOAM has leveraged BMO Investments’ mutual funds to reach a combined total of $108 billion in retail investment fund AUM as of Sept. 30. Within BMO Investments’ mutual fund family, there are ETF-based products in the form of index funds, asset-allocation funds, covered-call funds, low-volatility funds and tactical ETF portfolios.
That’s not all. Half of BMO Investments’ mutual funds hold at least one ETF in their portfolios, says Raes. BMOAM also has launched ETF versions of several of its actively managed mutual funds, including two fixed-income strategies.
In Canada, the concept of holding an ETF within a mutual fund wrapper dates to November 2009, when Toronto-based Invesco Canada Ltd. pioneered the practice under its former PowerShares brand. Says Christopher Doll, vice president, ETF sales and strategy, at Invesco Canada: “At the time, that [strategy] was revolutionary. It was a way for both mutual fund[-licensed financial] advisors and full-service brokers to get access to ETFs through a mutual fund.”
These mutual funds (now offered under the Invesco brand) and their underlying ETFs effectively are the same from a taxation standpoint, Doll says. The key difference is that the ETFs trade on an intraday basis, while mutual funds trade only at the end of the business day and at net asset value. Adds Doll: “But the underlying investment strategies are effectively the same.”
The combined presence of ETF-based mutual funds, sold through firms and advisors licensed by the Mutual Fund Dealers Association of Canada (MFDA), and ETFs sold through firms and advisors licensed by the Investment Industry Regulatory Organization of Canada (IIROC) contributed to Invesco Canada’s AUM growth over the past nine years.
“We’re now [at more than] $10 billion in [AUM arising from] Canadians buying our [ETF-based] mutual funds, our Canadian-listed ETFs and our U.S.-listed ETFs,” Doll says.
Among the other asset- management firms that have investment-management teams responsible for both ETFs and their mutual fund equivalents are AGF Investments Inc., Mackenzie Investments and, most recently, Fidelity Investments Canada ULC, all based in Toronto. The effective exposure of the ETF and mutual fund portfolios’ holdings will be very similar to one another – more so if the mutual fund holds the underlying ETF only.
“Giving access to the broad industry of advisors, not just IIROC[-licensed registrants], was very important to us,” says Andrew Clee, vice president of ETFs at Fidelity Canada, which launched six factor-based ETFs and six corresponding mutual funds that will hold these ETFs in September.
Although MFDA-licensed registrants now are able to take courses to meet proficiency requirements to sell ETFs, MFDA member firms may lack the infrastructure and personnel to do so, Clee says.
In addition, as Fidelity ETFs – and ETFs in general – don’t provide embedded advisor compensation, commissions-based advisors can sell Series B of Fidelity mutual funds, Clee says: “We’re trying to give the [investment] community more tools.”
There also are client-focused reasons why placing clients in ETF-based mutual funds rather than in the underlying ETFs may be appropriate. For example, mutual funds are better suited to dollar-cost averaging or systematic withdrawal plans.
A deterrent for mutual fund sponsors contemplating launching actively managed ETFs based on the sponsor’s mutual funds is the requirement to provide constant disclosure of their portfolios. To maintain a competitive bid/ask spread for ETF trading, portfolio managers must reveal their up-to-date holdings to market-makers, but not to the public.
So, if an active ETF portfolio manager is accumulating a new position and confidentiality isn’t maintained, there’s the risk of front-running – which would be detrimental to that ETF’s investors. “Passive or quantitative strategies do lend themselves more favourably to an ETF strategy, in the sense that there’s less sensitivity around the holdings information,” says Clee.
For that reason, Fidelity’s opening lineup of ETFs doesn’t feature the stock-picking expertise of the firm’s Will Danoff or Joel Tillinghast, for example. Says Clee: “I would love to get [them] out there, as long as we can find a way to maintain our privacy.”
This story is part of a four-part series that explores the state of Canada’s mutual fund industry. For more, see investmentexecutive.com