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The Globe and Mail

ETFs based on Morningstar Canada indexes on the way

XTF Capital Corp., a unit of First Asset Investment Management Inc., plans to roll out seven exchange-traded funds (ETFs) using Morningstar Canada indexes that track everything from dividend-paying stocks to Quebec and emerging market plays.

XTF is the first Canadian ETF provider to license these indexes, while U.S.-based BlackRock Inc.'s iShares ETF provider already uses indexes created by its parent Morningstar Inc., a fund research firm.

"We believe that we are offering something new, and that will be value-added for investors and advisers in Canada," said Barry Gordon, president of First Asset. "We are striving to deliver better returns with less risk than the broader market."

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The first three funds, which will be listed next Monday on the Toronto Stock Exchange, include XTF Morningstar Canada Dividend Target 30 ETF, XTF Morningstar U.S. Dividend Target 50 ETF and XTF Morningstar National Bank Québec ETF.

The XTF Canadian dividend ETF, which tracks 30 dividend-paying stocks, yields 5.6 per cent. That could change, but it is now higher than the yield on competing ETFs in Canada, Mr. Gordon said. "We are screening for stocks that pay strong and supportable dividend yields, but that have better risk-adjusted returns."

XTF Morningstar Canada Value ETF and XTF Morningstar Canada Momentum ETF are expected to be launched on Feb. 15, while XTF Morningstar Canada Liquid Bond ETF and XTF Morningstar Emerging Markets Composite Bond ETF will likely roll out in March.

The management expense ratio (MER) ranges from 0.30 per cent for the bond ETF to 0.60 per cent for the value and momentum ETFs. The dividend ETFs charge 0.50 per cent.

Mr. Gordon, however, could not reveal terms of the exclusivity agreement for the indexes because of its confidential licensing agreement with Morningstar Canada.

Toronto-based XTF is a relatively new Canadian ETF player with less than $50-million in assets in six funds launched since mid-2011. (First Asset, which manages and administers about $2.5-billion in assets, also runs mutual funds and closed-end funds.)

XTF faces stiff competition from ETF powerhouse BlackRock, which recently bought Claymore Investments Inc., and from U.S.-based Vanguard Group Inc., which recently launched ETFs in Canada. Bank of Montreal and Royal Bank of Canada are also in the game now.

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Mr. Gordon said he is not worried because his XTF offers a differentiated offering from the ETF giants with their market-capitalization indexes.

"We don't view it as crowded space," he said. "There is only about $44-billion in Canadian ETFs relative to approximately $800-billion in Canadian mutual fund assets. We see tremendous opportunity, particularly in the Canadian adviser channel, where there has been very low penetration in the use of ETFs."

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