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This article appears in the 2023 ETF Guide issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.

Breaking into the ETF industry isn’t easy — just ask Myron Genyk.

Genyk is CEO and co-founder of Toronto-based Evermore Capital Inc., which launched Canada’s first target-date retirement ETFs in February 2022. The suite received extensive media coverage and amassed $14 million in assets under management (AUM) before Evermore announced, 364 days later, that it was terminating those funds.

In a market where an ETF’s break-even point can begin at $50 million in AUM, large players routinely launch funds with expensive advertising campaigns while rebating management fees — actions that are generally out of reach for boutiques.

Genyk attributed the failure of the target-date ETFs primarily to an unfavourable economy and poor overall market performance, but also to distribution challenges.

Despite the ETFs’ relative simplicity, “one platform wouldn’t even allow their advisors to buy our ETFs until we had three years’ track record and $25 million in AUM,” he said.

Pat Dunwoody, executive director of the Canadian ETF Association, acknowledges the high barriers for entrants not backed by a multinational corporation or a large suite of complementary products, especially amid stricter know-your-product rules.

“If you’re new, you may not even be looked at because [dealers and financial advisors] may say, ‘We want to wait until you’re around for a year or two,’” Dunwoody said. But without distribution, the products may not survive long enough to achieve the required history.

As a result, aspiring players must consider alternative means of getting to market.

“I’ve had a few people approach me over the last few months with great ideas for launching a product. The advice they’re getting is to white-label first,” Dunwoody said, which allows a fund to launch under another firm’s registration. “If it’s a good idea, you should be able to find a firm that will allow you to white label or be a subadvisor, with a sunset clause if you choose.”

Evermore had received white-labelling requests from portfolio managers who’d been turned down by larger ETF providers that wanted to focus on their own lineups. Genyk initially said no for the same reason. But once Evermore terminated the target-date suite, “we thought it made sense for us to move into the space,” he said.

In the spring, Evermore debuted the country’s first white-label platform, Evermore LaunchPad, which will allow an entity to use Evermore’s registration as a portfolio manager and investment fund manager to launch a product with the issuing entity’s branding — reducing compliance and startup costs. The entity also can learn from Evermore’s experience in bringing products to market.

Genyk said white-labelling is now his firm’s main focus.

“In fairness to our clients, I don’t think we’re going to get back into ETFs ourselves. We don’t want to compete against them,” he said. “We want to help them grow their funds and see them succeed in the Canadian marketplace.”

Create what you know — and stick to it

Leveraging existing expertise was partly why Toronto-based Bristol Gate Capital Partners Inc. launched its ETFs a few years ago.

The firm was founded in 2006 and runs U.S. and Canada high-dividend growth mandates. Bristol Gate’s first funds were for accredited investors only, but after getting onto a bank platform in 2016, the firm saw demand at the retail level and responded by launching ETF versions of its U.S. and Canadian limited-partnership funds in 2018.

“We’d already proof-tested the products,” said Jamie Houston, senior relationship manager with Bristol Gate.

As of July 31, the company managed $2.8 billion in AUM, with $243 million of that in the ETFs.

Toronto-based Mulvihill Capital Management Inc. also launched its first ETF following the success of its signature strategies within other structures.

The 28-year-old firm specializes in options-based strategies and enhancing yield through leverage, having launched Canada’s first covered call-writing bank product in 1995. In 2008, Mulvihill Capital streamlined its lineup to strictly closed-end funds and institutional mandates for select clients. But in 2019, seeing opportunity in a broader market, it launched mutual fund and ETF versions of a premium yield fund.

Today, Mulvihill’s ETF lineup has $79 million in AUM as of July 31 across that ETF and two other sector-focused enhanced-yield funds. The firm manages $400 million in AUM altogether.

John P. Mulvihill, president and portfolio manager, said the mutual fund and ETF launches were made smoother by his firm’s history of working with banks on closed-end funds and derivatives trading.

“It becomes an easier pitch … if you have investment bankers and traders both [saying], ‘We have a long relationship; they’ve supported our business over the years,’” Mulvihill said.

Both Mulvihill Capital and Bristol Gate see the value of a tight lineup and a narrow focus.

“Some of the big firms are like a Baskin-Robbins — whatever flavour you want, they have it. But we are a high-dividend growth specialist and that’s all we do,” said Michael Capombassis, president of Bristol Gate. “We’re never going to have 20 products.”

Capombassis said the firm could eventually expand to global or mid-cap mandates, but only after rigorous analysis.

“Typically, we will incubate [a new] product internally, with our own money, for a year or number of years, to make sure we feel comfortable this is a product that will add value [to our lineup and client portfolios] over time,” Houston said.

Mulvihill Capital, too, takes extra care when contemplating new products. The firm spends time talking to investors and advisors about gaps that exist in their portfolios so it can understand where demand could come from.

“We try to build a book before we launch. We don’t have an asset-management arm that can throw $300 million into an ETF because they put it into a model [portfolio],” Mulvihill said. “Getting up the curve quickly is really important in order to make the fund viable.”

This caution might mean shelving a new product, even while sacrificing first-mover advantage. Mulvihill said his firm was the first to obtain regulatory approval for single-stock ETFs in Canada but decided against launching them after a cost/benefit analysis.

“At 65 basis points, we were probably going to [need] $40 million or $50 million in AUM to break even, and there were going to be followup competitors,” Mulvihill said.

Purpose Investments Inc. was ultimately first to market, launching single-stock ETFs in December 2022. (See “Single-stock ETFs versus CDRs: A comparison”.)

“When you’re a large firm, you’re willing to take more shots on innovative products. For us, we’ve got to make sure it’s something [that] will be profitable,” Mulvihill said. “We can’t compete on cost. We can’t draw our management fee to 12 basis points [for example] and keep a profitable business.”

Mulvihill said any future launches would remain within his firm’s wheelhouse: for example, other leveraged option-writing products focused on sectors such as energy or real estate.

Getting past the gatekeepers

If any company has experience breaking down barriers, it’s 3iQ Corp. In 2019, the Toronto-based fund manager successfully challenged a decision from the Ontario Securities Commission so it could offer the world’s first publicly traded bitcoin fund.

Despite this achievement, the firm still faces closed doors. “Our biggest challenge is getting on the platforms of the major bank brokerages,” said Fred Pye, chairman and CEO of 3iQ. “The gatekeepers at the major firms haven’t embraced our asset class.”

Pye said 3iQ instead focuses on educating financial advisors because “the advisors who have influence can usually get around the gatekeepers.”

3iQ’s two cryptocurrency ETFs and its two closed-end funds held a combined $650 million in AUM as of July 31. (The largest cryptocurrency ETF in Canada, the Purpose Bitcoin ETF, has about $1 billion in AUM.)

“We’ve got great exposure in the Canadian industry,” Pye said, noting that his firm’s weekly digital assets newsletter has about 12,000 Canadian subscribers. “But until the banks release the shackles, it’s going to be hard to see any of the digital-asset ETFs gain traction.”

As a result, 3iQ sees its greatest opportunities globally. The firm works with institutional investors in the U.S., Middle East, Europe and Asia. (It also has an office in the Voxels Metaverse.) Pye said about 75% of 3iQ’s AUM is held in Canada, and he sees that percentage dropping to below 50% as the firm grows.

“You’re going to see significant expansion of 3iQ in Hong Kong, Singapore and Japan,” he said. “[The] Canadian market seems stagnant at this time.”

Likewise, Bristol Gate sees future growth coming from both inside and outside Canada.

“We’re working hard to earn spots on more bank platforms as a complementary product — not to displace a bank product,” Capombassis said. “When we look at other conventional dividend strategies, we tend to have very little stock overlap.”

He said Bristol Gate has been registered with the U.S. Securities and Exchange Commission since 2015, and “we’re on some of the biggest wealth management platforms in the U.S. as a SMA [separately managed account] product.”

This type of success can beget further success. “When you get on these platforms as an SMA, often advisors will start to use the ETFs more,” Capombassis said.

Dunwoody agrees that familiarity and relationships are important for smaller ETF players.

“Somebody will open their door because they’ve known you for 10 years,” she said. “As opposed to ‘not only do I want you to open to door for someone you’ve never met, but I want to talk to you about a product you’ve never heard of.’ If you’ve got someone who’s really well known and well respected in the industry, it may be worthwhile hiring them to open doors.”