Fees have sneaked into more parts of our lives. Late fees, transaction fees, even inactivity fees for not using a service such as an online brokerage often enough. In most cases they are a minor annoyance.
But mutual fund fees are another matter. They can be a big drag on the growth of your retirement savings.
So it should be no surprise that exchange traded funds have gained in popularity with Canadians seeking the diversification of mutual funds at a fraction of the cost. The ETF space has matured enough, in fact, that the pace of product introductions is slowing, and competition has prompted some providers to trim fees.
Those who haven’t been paying attention to the ETF market might be surprised to learn that it is dominated by seven players – and that just two of those are connected with the country’s big banks.
Last year, Canadian-listed ETFs chalked up another record showing, increasing assets by more than 30 per cent to $56.4-billion. They also continued to close the gap with mutual funds; at year-end, investors had sunk $15 in mutual funds for every $1 in ETFs, down from a ratio of 18:1 the prior year, according to the Canadian ETF Association.
ETF providers are almost Darwinian with regard to adding and culling funds from their respective portfolios. Six of the country’s seven ETF sponsors introduced new funds in the fourth quarter of last year in preparation for the RRSP season, and 11 funds, generally thinly traded ETFs, were terminated last year, the association reported.
“There has been an awful lot of new [funds] over the last two or three years,” said Yves Rebetez, managing director and editor of ETFinsight.ca, a website that covers the industry for investors. He sees the pace of product introductions slowing with the maturation of the industry and an unwillingness by providers to continue to support funds that prove unpopular.
“It’s a healthy situation,” he said. “It underscores that we have an awful lot of ground that is already covered, and providers are being rational” about ETF introductions that don’t catch on with investors.
Among newer ETFs, Mr. Rebetez likes the series that First Asset Exchange Traded Funds has launched with investment-research firm Morningstar Inc. The fund provider offers six Morningstar-branded issues including the First Asset Morningstar Canada Dividend Target 30 Index (DXM) and the First Asset Morningstar Canada Dividend Target 30 Index (EXM). The series is the first in Canada to bundle Morningstar’s Computerized Portfolio Management Services for use with ETFs.
That does not mean they have taken the ETF world by storm. “They have not garnered clearly the attention of the marketplace yet,” said Mr. Rebetez.
He also notes that investor acceptance of the new minimum volatility ETFs, which aim to create a portfolio of stocks with lower volatility than the overall market without giving up expected returns of the larger market, has been far less enthusiastic in Canada than in the United States.
Bank of Montreal gets credit for bringing out the first low-volatility product in Canada, said Mr. Rebetez, and it has been followed by PowerShares (Invesco Canada) and iShares (BlackRock Asset Management Canada).
“To me these [low-volatility ETF] products are interesting because I don’t entirely buy into the notion that we are out of the woods or that investors should abandon all caution and decide that because we are at a five-year high in the market that it is all safe,” he said.
A potential downside of low-volatility ETFs is that the attributes intended to protect investors from market declines will not necessarily allow them to enjoy all the fruits of a sharp market upturn.
In Canada, there is enough competition in the ETF space to prompt providers to trim fees from time to time, said Jaime Purvis, executive vice-president of national accounts with Horizons Exchange Traded Funds. His firm offered a two-basis-point (0.02 per cent) rebate, from seven basis points to five basis points, on its S&P/TSX 60 Index ETF (HXT), an action that was matched by some competitors.
For Horizons, that fee drop paid off. “It is easier to extend a rebate when assets go up,” said Mr. Purvis. Assets in the Horizons ETF rose from about $380-million at the time of the fee drop to around $677-million today. “What that did was bring people’s attention to the fact that it is a more tax-efficient vehicle in a non-registered account.”
While ETF fees are just a fraction of what most mutual funds levy, Canadian investors will likely not benefit from a price war in fees similar to that which is occurring south of the border.
“There is no all-out war here like there has been in the U.S., partly because the ETF companies are really targeting mutual fund assets” and their higher fees, he said.
Mr. Purvis and others in the ETF industry are not predicting the death of the mutual fund any time soon, however.
“Mutual fund assets are still going up in Canada, it is just the rate of growth has slowed. Part of that is just because of the broad domain that the banks have in terms of being able to sell mutual funds to their branch clients.”
The seven players
The Canadian ETF industry has grown from two providers and $15-billion in assets in 2006 to seven providers (down from eight after iShares’ acquisition of Claymore last year) and $56.4-billion. The players:
iShares: Managed by BlackRock Asset Management Canada Ltd., iShares is the leading ETF provider with roughly $41.68-billion in assets under management as of Dec. 31, 2012.
BMO Exchange Traded Funds: The Bank of Montreal unit had $9.05-billion of assets under management and 49 ETFs as of Dec. 31, 2012.
Horizons Exchange Traded Funds: Had more than $3.65-billion in assets under management and 91 ETFs at year end.
PowerShares ETFs: In Canada, Invesco PowerShares had $1.32-billion in 14 ETFs at year end.
Vanguard ETFs: In Canada, Vanguard had $472.31-million across 11 separate ETFs at year end.
RBC ETFs: The Royal Bank of Canada unit had $162.7-million across nine ETFs at year end.
First Asset ETFs: First Asset (formerly XTF Capital) had $116.5-million in 15 ETFs at year end.