‘Ottawa’ ‘Gone Wild’: The ETF Industry is Refusing to Mellow With Age
Having turned 25 last year, you might have expected ETFs to settle down a little — mature, as it were. Gauging from the recent heightened level of activity, however, you would have been off the mark. You might even be thinking that all the activity surrounding ETFs of late means … ETFs have gone wild! Here is a roundup of recent developments in the Canadian ETF space:
Back to the Future with TD
TD Asset Management launched six ETFs recently as they rejoined the ETF issuers ranks after a 10 year absence. I call it ‘back to the future’ because to start, TD has opted to go with “vanilla” core beta/broad benchmark exposure, such as the S&P500 and the S&P/TSX Composite Index. Actively managed ETFs are also on the horizon for TD.
More dividend smart beta
Sphere Investments became the latest purveyor of smart beta. Two themes stand out from discussions with them: One, they believe that dividends will remain a significant ingredient; and two, they want to encourage Canadians to invest globally, hence management fees have been kept at the same level across their offerings.
Mutual Fund company Mackenzie launched four actively managed fixed income ETFs this week. Active is — in my mind — clearly the operative word here. To extrapolate the “value” attached to this active management, if you will — take broad bond ETFs (of the passive kind), and subtract their fees from those of each corresponding active ETF. That way, you will have obtained a “proxy” number as to the value that Mackenzie puts on their active services.
Extending their reach
Horizons followed its recent China Dividend ETF with the launch of a Canadian High Dividend yield ETF, a NASDAQ100 ETF, and will soon list a EURO Stoxx 50 (TR) ETF. For Horizons, it is about focusing on “Tracking; costs; and tax efficiency – through Total Returns Swap contracts.
More and more solutions
iShares rounded out its factors offering and also re-branded them. Core: check; Factors: check; Satellite: check. Could, or should an ETF strategist be considered here in the near future?
Invesco Powershares launched the PowerShares DWA Global Momentum Index ETF (DWG), which became in the process the first listing on Aequitas’ NEO Exchange, which, in a little over a year of existence, is already apparently making significant market share inroads in terms of ETF trading in Canada. Given the success of BMO ETFs in offering access to an ETF strategist focused on technical analysis, it will be interesting to see if investors embrace what is — in the U.S. — a recognized brand amongst “technical analysis” aficionados.
Hamilton Capital launched an actively managed Global Banks ETF, to be followed by a Global Financials Yield ETF.
Vanguard filed to join the ranks of smart beta manufacturers with a globally-oriented offering featuring management fees likely to alter the smart beta pricing landscape in Canada going forward
So what does all of this activity add up to? Here are three key themes for 2016:
CI Funds acquired First Asset in late 2015. Now, Mackenzie has launched its ETF initiative, while TD Asset Management is back in the ETF game. These moves confirm that the ground is shifting, which, with more established players entering the fray, likely will speed up the overall ETF adoption process. If regulators do their part — banning trailer fees, and introducing best interest/fiduciary duty — then the growth curve for ETFs will kick into a higher gear.
Overall competition is intensifying across the board, from pure passive, benchmark-type exposure, where management fees are already razor thin, to Smart Beta-type solutions (see both Sphere’s pricing structure, as well as fees on the upcoming Vanguard Smart Beta ETFs), to actively managed ETFs (which also compete with traditional mutual funds).
With both the ranks of providers and product offering picking up pace anew, you and your advisor could be forgiven for fearing that greater confusion than ever will prevail. Whose smart beta should I choose? Why this provider’s beta ETF rather than that of its direct competitor? Hedged or unhedged? Active or passive?
“Stop, already,” you might say, “My head hurts!” That, I’m afraid, isn’t likely to happen.
Rather than lament a pace that looks to be picking up, embrace its merits: more solutions, more choices and greater cost effectiveness.
In a world of future return assumptions described by Richard Turnill, Global Chief Investment Strategist at the world’s largest money manager BlackRock, as “now at or near post-crisis lows, with many expected returns below historical averages,” all this will matter. The sooner you grasp this, the better.