New players expected to climb aboard ETF bandwagon

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The battle for exchange-traded funds is poised to escalate.

As ETFs grow ever more popular with investors, the industry expects to see several new players jump into the race, including more of Canada's big banks and, potentially, mutual fund companies and insurers.

"The growth in ETFs cannot be ignored," says Atul Tiwari, managing director at Vanguard Investments Canada Inc. " I think that all of the participants in the industry are looking at it, and probably figuring out how they can make it work within their existing business."

Currently there are nine ETF providers in Canada, including the Bank of Montreal and the Royal Bank of Canada. As of February, 2015, Canadian-listed ETF assets were $81.4-billion, according to Investor Economics.

Together BMO and RBC have $21.6-billion in ETF assets.

"If you take a look at historical precedent, you are hard pressed to find an important segment of the financial industry where banks have the regulatory scope to operate within it and they don't have a significant presence, " says Dan Richards, CEO of ClientInsights, a consultant to the financial advisory industry. "At some point all the banks will have a presence in the ETF space."

Canadian banks were relatively late getting into the ETF game (the first ETF in Canada was launched in 1990, but Canadian banks didn't follow suit until 2009), but with BMO and RBC already in the space, the other banks might not be far behind, says Susanne Alexandor, managing director and head of wealth management at Cougar Global Investments Inc.

"Why wouldn't the banks launch their own suite of ETF offerings?" says Ms. Alexandor. "They have such powerful distribution channels. And not just their adviser channels, but their asset management divisions as well."

Several industry experts believe TD could be the next big bank to join the ranks.

It wouldn't be the first time TD has entered the ETF marketplace. TD Asset Management Inc. launched four ETFs in 2001, but exited the ETF business in 2006 due to low trading volumes.

"I could see TD re-entering the market but they lost their advantage of first out of the gate among the banks," says Dan Hallett, vice-president and principal with HighView Financial Group. "TD was ahead of the pack on index mutual funds as well so it's odd that they backed out of the ETF market. I never understood why exactly, unless they just didn't see the kind of growth that we've seen."

CIBC is also seen a a strong contender to enter the ETF business, mainly due to its index fund family, says Mr. Hallett.

"CIBC had a couple of different initiatives to bring fees down to compete with ETFs over the years," says Mr. Hallett. "Currently, their premium series of index funds (which have a $50k minimum investment) have fees as low as 0.4 per cent per year."

TD and CIBC declined to comment.

Both BMO and RBC are prepared for more competitors entering the space.

"With the growth and the benefits of ETFs, there will be a lot of new players in the industry and I would not be surprised if the other banks entered," says Kevin Gopaul, chief investment officer at BMO Global Asset Management. "They are all watching the success of ETF providers and I think almost every firm is being asked to develop an ETF strategy. Part of that strategy may be that they are not going to launch ETFs, but they are developing a strategy."

Launching an ETF platform won't be for everyone, says Steve Hawkins, co-CEO of Horizons ETFs Management (Canada) Inc., adding he doesn't think all the Canadian banks will join the ETF marketplace.

"Not everyone can jump into the ETF business because of the resources," says Mr. Hawkins. "Managing an ETF company and building the infrastructure is very complicated. It takes a lot of skill and expertise, and whether or not the all the banks really want to do that is hard to say."

While the banks are no doubt looking closely at the ETF market, it is more likely the mutual fund companies and life insurers who will be looking to enter the ETF space, says Mark Neill, head of RBC ETFs.

"The banks are still doing well in terms of mutual fund sales and that may be because of their proprietary distribution, but I think the mutual fund companies, the asset managers, who don't have the distribution to help them, they will be the ones turning towards ETFs," says Mr. Neill.