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Rob Carrick

Advisers cozying up to ETFs Add to ...

If exchange-traded funds aren’t in your investment portfolio yet, just wait.

The second wave of the ETF revolution is upon us and it’s going to put ETFs in the hands of a lot more investors. The first wave of ETF growth attracted about $42-billion in assets over the past 21 years. That’s just a warm up to what could be coming.

The key to the next phase of ETF growth in Canada is getting more investment advisers to put clients in these index funds that trade like stocks. PowerShares, a big U.S. ETF player that introduced two new Canadian funds on Wednesday, is focusing on advisers, and so is Vanguard, another U.S. giant that is coming to Canada.

More ETFs and ETF companies – just what we need, right? The number of ETFs listed on the TSX crossed the 200 mark a short while ago, and the newest products are either complex in their construction or they cover the same ground as existing funds with only marginal price differences.

Lots of ETFs, but not a lot of advisers selling them: That’s the opportunity being eyed by Michael Cooke, vice-president at PowerShares Canada. He’s been talking to advisers about ETFs and has concluded there’s a big untapped market.

“Even some of the most sophisticated advisers out there have a very limited understanding of the mechanics and the structure of ETFs,” he said. “This tells me we’re still in the infancy ETF adoption.”

Vanguard won’t say whether it’s bringing ETFs and its renowned lineup of low-cost index mutual funds to Canada. The one piece of information it does offer is that it will focus its marketing on fee-based investment advisers, who dispense with commissions on the sale of products and instead charge clients in the area of 1 to 2 per cent of their account value.

Why Use Advisers?

Focusing on advisers makes good business sense. While ETFs are often associated with do-it-yourself investors, the market for people who use advisers is much larger.

“There’s a huge percentage of the U.S. investment base that works through advisers, whether they’re buying ETFs or they’re buying mutual funds,” Dennis Duffy, a principal with Vanguard, said from company headquarters in Valley Forge, Pa.

He sees a similar reliance on advisers here in Canada, and data from the analysis firm Investor Economics backs this up. It shows that there’s about $826-billion in assets held by advisers at full-service brokerage firms, compared to $254-billion at online brokerage firms.

Buyers of the iShares ETFs sold by BlackRock Asset Management Canada are divided in roughly equal proportions between DIY investors, institutional investors such as pension funds and advisers, said Mary Anne Wiley, iShares managing director. She said all three channels are important to BlackRock, but noted some special potential with advisers.

In a survey of advisers conducted last fall for BlackRock, 80 per cent of participants said they held some ETFs in client portfolios. However, ETFs only accounted for 6 per cent of those portfolios.

Opportunity Abounds

“If you take that 6 per cent up to 10 per cent or 20 per cent, that’s a lot of opportunity,” Ms. Wiley said. She’s also encouraged by the fact that 86 per cent of advisers in the survey indicated they were more likely to use ETFs in the next 12 months.

ETFs at their simplest give investors a cheap and flexible way to buy into the returns of marquee stock and bond indexes in Canada and around the world. Advisers haven’t been big believers in index investing, largely because it’s more lucrative for them to sell conventional mutual funds.

But the experience of the Invesco Trimark family of mutual funds suggests advisers are receptive to using index investments such as ETFs in addition to regular mutual funds. About a year and a half ago, the firm introduced PowerShares Funds (PowerShares is part of the same corporate family), which are mutual funds that each hold a single ETF. They’re aimed at advisers who aren’t licensed to sell ETFs and they’ve sold well.

Invesco Trimark president Peter Intraligi said the firm’s ETFs in a mutual fund wrapper have attracted $1.2-billion in assets, much better than the $300-million targeted at launch. To him, it’s a sign that advisers are wide open to the idea of mixing index investments and conventional mutual funds. “It’s not one versus the other,” he said. “They absolutely are complementary.”

Do-it-yourself investors already “get” ETFs, and now advisers are starting to as well. If exchange-traded funds aren’t in your investment portfolio yet, just wait.

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WHO'S WHO IN CANADIAN ETFs



iShares



The first and largest player with 71.4 per cent of the market.



Claymore



Second into the market and the No. 2 player with 15.4 per cent of the market.



Horizons



Third-ranked by assets and a pioneer in Canada with actively managed and leveraged ETFs.



Bank of Montreal



Just marked its second anniversary in the ETF market; biggest market share gainer this year.



XTF Capital



Listed its first five ETFs this month; owned by First Asset Capital.



PowerShares



This arm of the fourth-ranked U.S. ETF company listed its first Canadian ETFs on Wednesday. They are:



-PowerShares 1-5 Year Laddered Investment Grade Corporate Bond Index ETF



-PowerShares Ultra DLUX Long Term Government Bond Index ETF



More PowerShares ETFs are coming imminently.



Vanguard



Coming to Canada, but has yet to confirm whether it will list its ETFs on the TSX.





source: BlackRock

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