A year ago, amid a shakeup in regulations that helped to further propel the rise of exchange-traded funds, U.S. ETF powerhouse WisdomTree Investments Inc. announced plans to quickly launch a Canadian arm.
The entrance of such a well-known name from the United States drew significant attention in Canadian wealth-management circles and promised a formidable new competitor for the established domestic players in the ETF industry.
But as the company surpasses its one-year mark in Canada this month, WisdomTree has yet to catch on with investors. The company is struggling to play catch up in an industry that has seen a flurry of new competitors emerge, including some of the country's largest asset managers.
The New York-based company is the seventh-largest provider of ETFs in the United States, with $43-billion (U.S.) in assets under management. It first hit Canadian soil last July, launching six equity ETF products. Two additional ETFs, which provide exposure to fixed-income investments, came to market last month.
Although it had $119-million (Canadian) in assets under management as of June 30, the majority of that capital has been generated from $90-million in seed funding – the initial investment an ETF provider must make to unveil a new tradeable product. It took until this past May and June to see tangible signs of progress; over that two-month period, Wisdom Tree saw its first net inflows of $20-million, according to a recent ETF report by National Bank Financial.
Right out of the gate, the company hit a few snags. It initially hired Raj Lala, former head of retail distribution at Quebec-based asset manager Fiera Capital, to run the Canadian division. But less than eight months later, Mr. Lala resigned, stating the partnership "wasn't a good fit" for him.
As well, a branding issue arose that involved one of the key selling points of its products. WisdomTree is widely known in the U.S. as a pioneer of currency hedging in ETFs. Using a rules-based strategy, WisdomTree offers so-called "dynamic currency hedged" ETFs that reduce the volatility and downside of foreign-currency moves through complex calculations involving momentum, interest-rate differentials and valuation signals.
But upon entering the Canadian marketplace, it had to rename the strategy "variable hedging" to avoid confusion with the well-known Dynamic Funds brand, which belongs to the Bank of Nova Scotia.
The attention the Canadian launch received quickly died down as the company searched for new leadership and pursued the rebranding of one of its strongest investment strategies.
"Their quantitative 'dynamic currency hedging' was pretty interesting and a Canadian first, but for obvious trademark conflict reasons they had to rename it 'variable' hedging, and that name change, along with the departure of their former head, may be two of the speed bumps that stymied their initial growth plans," said Daniel Straus, an ETF analyst with National Bank Financial.
"As for asset growth, there's no question that in the U.S. they're a well-recognized and respected brand, but that may not necessarily translate to the Canadian investment community, which has its own playing field of established mutual-fund providers now entering the market."
Launching in the Canadian market can be dramatically different for asset-management firms than the much larger U.S. market. Large, established investment managers – including Canada's dominant banks – already enjoy strong distribution networks and brand recognition. Mutual-fund powerhouse Mackenzie Financial, for instance, launched its own line of exchange-traded funds just before WisdomTree and already has more than $620-million in ETF assets.
"WisdomTree has been here for a full year now and they have tried to very unsuccessfully build a sales and distribution team -- and that I see is the single largest aspect that anyone coming into the Canadian ETF landscape needs to understand," says Steve Hawkins, president and co-chief executive officer of WisdomTree competitor Horizons ETFs Management (Canada).
In the U.S. market, ETFs are so well-established and popular that it requires less effort on the part of asset managers to sell them, Mr. Hawkins said. "But the Canadian market is still primarily driven by the retail adviser network and without some established distribution, it is extremely difficult to penetrate the Canadian ETF marketplace."
Upon Mr. Lala's departure, the firm did not appoint a new Canadian leader but told The Globe and Mail it "remained committed to executing against our strategy in Canada." The firm tapped into its U.S. resources and assigned Kurt MacAlpine, executive vice-president, as the new acting country manager for Canada.
Mr. MacAlpine has his own Canadian roots: He was born and raised in Saint John. Now frequently commuting between the Toronto and New York offices, Mr. MacAlpine disagrees that the firm has been slow to penetrate the Canadian market. On the contrary, the company is "perfectly on track" to where it should be at its one-year mark, pointing out the considerable work that is required in putting the selling and marketing "infrastructure" in place, he says.
"We aren't coming into this market fresh or ice cold because we are a global leader in ETFs, and this transition has been a great one as we already have warm relationships here," Mr. MacAlpine said in an interview with The Globe. "If you look at the infrastructure we have in place into the existence of the Canadian marketplace – in just under a year – I am thrilled at where we are. How many ETF sponsors within the first 10 months have built cross-country coverage with a team of leading wholesalers, in-house expertise, dedicated research and capital-markets expertise, as well as maintain a track record of running ETF money."
While many Canadians may not recognize the WisdomTree brand, Mr. MacAlpine said advisers here had already been using their U.S products in portfolios prior to the launch. Currently, $700-million (U.S.) in assets from its U.S. business resides with Canadian investors.
With the company's first six Canadian funds now having one-year track records, Mr. MacAlpine is optimistic WisdomTree will be able to penetrate the market here successfully. The company began advertising in early 2017 and has hired five full-time wholesalers who are dedicated to the advisory community across Canada. The company is counting on those channels for the majority of its business in Canada, even though its ETFs are also available direct to investors through online brokerages. He believes the brand will soon start to resonate with those investors looking for an alternative to the bank offerings.
"The market continues to get a lot more competitive and I think you will see two types of firms emerge," Mr. MacAlpine said. "You will see firms that have the resources and the ability to compete across [an investor's entire] portfolio … and I think you will also see a lot of niche sponsors in the market as well with particular capabilities."
With files from Tim Kiladze