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exchange-traded funds

Bank of MontrealDeborah Baic/The Globe and Mail

Bank of Montreal, the country's newest entrant to the exchange-traded fund business, will officially launch nine new ETFs today to stake out its territory in this fast-growing segment.

It's the only bank in the business, and hopes to keep it that way - or at least stay three steps ahead of the competition.

"It's a product where the margins are quite slim, so I don't think there's room for everybody," said Gilles Ouellette, the head of BMO's wealth management business.

While ETFs might not carry large profit margins for a bank, they can generate trading and advice fees. And BMO is looking to differentiate itself among the banks, which are each dedicating new resources to their wealth management divisions and fighting to grab a bigger share of the baby boomers' retirement savings.

And so BMO plans to continue the expansion of its nascent ETF business, despite the risk that it could eat away at its more profitable mutual fund offerings.

"There is obviously going to be a certain amount of cannibalism," Mr. Ouellette said. "But we expect that this product is going to grow independent of mutual funds."

Canada's ETF market was worth about $19-billion in 2008, according to Investor Economics. It's forecast to grow rapidly over the next decade.

Toronto-Dominion Bank was actually the second entrant into the Canadian business, after Barclays Global Investors Canada Ltd., but it abandoned the segment in 2006.

With 30 of the country's 95 funds, Barclays now commands 80.5 per cent of the market, according to Investor Economics. BMO, with the four funds it launched in June, has 0.05 per cent.

Since conceiving of those initial funds, the bank has recruited the team from Barclays that made the first splash in this market, headed by Rajiv Silgardo, former chief executive officer and chief investment officer of Barclays Global Investors Canada. He is now a managing director and head of ETFs at BMO.

"I and some members of my team were leaving Barclays as they moved some investment functions to San Francisco, so that timing worked out really well," Mr. Silgardo said.

Profitability will go up with the size of the business, and BMO will have an advantage over any other banks that choose to compete, he said. "There is a first-mover advantage in the business, in that it allows you to build brand and scale."

Asked whether he thought the business could be profitable for the bank in its first year, Mr. Silgardo said "all businesses take a while to get going. So, I honestly can't tell you where break-even is in terms of months or years. But given trends in the marketplace, our belief is that if we continue to stay focused and committed to what we're doing and continue to think long-term, that we'll be successful at this."

He notes that while they were launched about a decade ago, ETFs have only really taken off in the last couple of years.

The funds launched today include a high-yield U.S. corporate bond ETF, a global base metals ETF, and a banks index ETF.

Mr. Silgardo said the BMO High Yield US Corporate Bond Hedged to CAD ETF was developed because Canada doesn't really have high-yield fixed-income products. Exposure to the U.S. dollar is hedged out of the ETF, so investors deal in Canadian dollars without currency exposure.

The global base metals product also is hedged, which Mr. Silgardo hopes will be popular with Canadian investors who no longer have the likes of Alcan, Inco and Falconbridge to invest in. And BMO expects that it might be able to capitalize on the current popularity of the Canadian banks with its bank ETF product, which gives equal weight to each of the large Canadian banks.

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