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Canada’s big banks are muscling into exchange-traded fund offerings and forcing a transformation of an industry dominated by independents, even while putting at risk the high profits and huge asset bases of their traditional mutual-fund businesses.

With a fourth Canadian bank recently announcing plans to offer ETFs, and several new product offerings coming to market from others, a shakeup is materializing in the wealth-management industry that has parallels to the banks’ successful move to dominate the mutual-fund industry in the late 1990s.

ETFs generally track an index and, unlike mutual funds, trade like a common stock on a stock exchange. Until recently, the majority of Canada’s major banks have been sluggish in bringing ETFs to market. Relative to the United States, ETF adoption was slow to take off in this country as banks believed that widely offering the lower-fee products could cannibalize their highly profitable mutual-fund businesses. The banks currently account for more than half of the $1.48-trillion in assets that sit in mutual-fund products, according to the Investment Funds Institute of Canada.

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But ETFs have recently seen a flurry of investment dollars piling in amid greater familiarity with the product and its cost advantages – and that trend may only be in its infancy. Canadian ETF assets under management are expected to jump to $406.9-billion by the end of 2026 from current levels of $153-billion, according to Strategic Insight Canada.

As a result, Canadian banks are no longer turning a blind eye to the investment products, and are exploring options such as launching robo-advisers – online portfolio managers that automatically rebalance a suite of ETFs – to increase uptake. Given their formidable distribution network made up of thousands of advisers and bank branches on nearly every corner in the country, independents are getting nervous.

“We know [all] the banks will enter and they are formidable competitors,” says Atul Tiwari, managing director at Vanguard Investments Canada Inc., the largest ETF provider globally. “We know the industry doesn’t need another index fund but there are certain parties that can compete with that type of product and those parties are the ones with distribution.”

A powerful distribution network was the main reason why the banks were able to sweep into the mutual-fund industry with huge success in the 1990s – and why they could potentially dominate a fragmented ETF market. There are now 28 ETF firms in the marketplace, up from 18 in 2016.

Last month, the Bank of Nova Scotia filed with regulators to become the fourth Canadian bank to offer ETFs. The bank’s asset-management division filed a preliminary prospectus with regulators for four ETFs. Each would be a so-called fund-of-funds, made up of underlying funds that allow for a more diversified product than the typical ETF that just tracks an index.

Offering fund-of-funds ETFs has been a popular strategy among several of the larger asset managers with substantial distribution networks and prominent brands. In many respects, the product offering is similar to a traditional mutual fund.

“There is absolutely no doubt in my mind that all the banks will be in the ETF space at some point in the near future, whether they decide to do it organically or from an acquisition perspective,” says Steve Hawkins, president & co-CEO at Horizons ETFs Management (Canada) Inc., the fourth-largest ETF provider in Canada. “They are seeing other people making money and eating their lunch. They will have no choice from an optics perspective to make that move, and they will do it exactly the same way they did when they entered the mutual fund industry.”

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In 2010, 91 per cent of investment fund dollars went into mutual funds, compared with only 9 per cent going into ETFs. Today, 34 per cent of fund sales are going toward ETFs, while mutual funds have dropped to 66 per cent, according to a 2017 report by Strategic Insight Canada.

Independent ETF providers – both large and small – have managed to open up shops and reap the benefits of that growth without much interference from the Canadian banks. As of October, 2017, Canadian-listed ETF assets grew 30.4 per cent year-over-year, compared to mutual fund assets that grew at a much slower rate, increasing 11 per cent year-over-year.

With the banks looking to expand their tentacles into the ETF market, independent asset players are at risk of losing market share in an already crowded market.

“We believe there is still room for independence – but it’s not going to be easy. It’s definitely tough to get in front of decision makers,” says Raj Lala, CEO of Evolve Funds Group Inc., a small independent provider of ETFs. “Banks have done a phenomenal job of [providing] customers with multiple products and services – if you deal with a bank on your investments, mortgage and checquing account – you will usually stay with them. Therefore, if they launch ETFs there’s a higher probability customers will use them.“

Currently, Bank of Montreal, Royal Bank of Canada and Toronto-Dominion Bank offer ETF products through their asset-management divisions. BMO launched its ETF business in 2009 and has since expanded the business to $48.4-billion in assets under management, second only to investment giant Blackrock Asset Management Canada Ltd.


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In 2016, it launched its own robo-adviser platform BMO Smartfolio, which added another line of distribution to sell its ETFs. It also repackaged its ETF products in a mutual-fund wrapper to be able to sell in its BMO bank-branch locations, bringing in an additional $6-billion to BMO’s ETF assets.

RBC Global Asset Management wasn’t far behind BMO, entering the market in 2011 with a group of plain-vanilla target maturity bond ETFs. Since then the bank has been moving up the ranks, recently becoming the country’s fifth-largest ETF provider, up from seventh in September, 2017. Today, RBC manages $4.6-billion in ETF assets.

Like BMO, RBC also launched an in-house robo-adviser platform – RBC InvestEase – offering portfolios comprised of only proprietary RBC ETFs.

TD Asset Management re-entered the ETF industry in 2016 with the launch of six index ETFs. It had first introduced ETFs back in 2001, but exited the business in 2006 owing to low trading volumes. Unlike its ETF counterparts, TD has seen lacklustre growth in its ETF business with only $75-million in assets under management. It has done minimal marketing campaigns to promote its ETF products and walked away from a project that was looking to build an in-house robo-adviser.

While TD continues to predominately focus on its mutual fund business, which includes over $3-billion in its popular low cost e-series mutual funds, TD Bank’s group head of wealth management, Leo Salom, says that the bank’s infrastructure and asset-management division is well positioned “for an expanded ETF and robo-advice offering in the near future.”

One major roadblock for the ETF industry – and the banks in particular – is the inability for mutual-fund advisers to sell ETFs. As a result, Canadian banks are not equipped to sell ETFs directly to clients in any of the 6,000 bank branches across the country. Investors looking to access the lower-cost products can only do so by setting up a discount brokerage account, through a financial adviser or with a robo-adviser.

Exchange-traded funds are defined under law as mutual funds and therefore mutual-fund advisers are technically licensed to sell the products. But, in most cases, they are still prevented from doing so because most mutual-fund providers do not have access to an exchange in order to buy and sell ETFs.

The Canadian ETF Association (CETFA), along with other industry groups, have tried to offer a solution to that issue through a trading platform developed by National Bank Correspondence Network. But it proved too difficult and costly to incorporate the technology into existing infrastructure for many investment firms.

Another effort is under way. Vexo, a Toronto startup, announced a year ago the launch of Vexo ETFbahn, a trading platform specifically designed to allow mutual-fund advisers to gain widespread access to ETFs. Several months later, the platform partnered with robo-adviser Justwealth to offer them preselected ETF portfolio options. The solution is still in its infancy and many wealth managers are still testing the waters with other fintech providers as well.

Whether the banks will open their branch network to sell ETFs also remains to be seen. It would involve a major overhaul and educational initiative on the banks behalf to ensure their sales force is up to speed on the intricacies of ETF products.

But the banks have successfully taken on such a task before.

During the late 1980s, independent asset managers were booming in mutual fund sales. Canada’s banks were late bloomers to get in on the fast-paced growth, but by the early 1990s all six big banks had launched asset management divisions with their own proprietary mutual fund families. Along with the large independent brands, overall mutual fund profits surged by 1,700 per cent – raising assets to $426-billion by 2001 from $25-billion in 1990, according to IFIC.

“Independent fund companies such as Investors Group and Trimark were industry leaders as the banks’ funds were never standout performers,” notes Dan Hallett, a principal with HighView Financial Group. “The numbers still looked good on paper. Yet the banks didn’t know how to take advantage of those products for the benefit of their wealth management businesses; largely because their branch staff (including managers) lacked the knowledge and sophistication to do so.”

As the decade came to an end, banks began to become more educated and started to regain market share to secure the dominant position they continue to hold today. A decade ago, the independent fund companies accounted for 57 per cent of the net assets in the fund industry, while the banks and credit unions only made up 31 per cent, according to research conducted by Strategic Insight. Today, the independents have dropped to 39.5 per cent, while the banks and credit unions have surged to 49.5 per cent of market share as of October, 2017.

Similar trends could soon be seen in the ETF industry.

“The banks ultimately are the largest asset managers in Canada and they have big shoulders they can put behind big projects,” Horizons Mr. Hawkins says. “There’s no doubt that the banks will knock us off from our number four spot at some point in time.”

Canadian Imperial Bank of Commerce and National Bank of Canada have yet to launch proprietary ETF products within their asset-management divisions, but their entrance is imminent.

Last summer, CIBC Asset Management Inc. posted an online job advertisement looking to hire an individual for ETF product development and management but has yet to fill the role. National Bank – unlike its competitors – has one of the strongest ETF research teams in the country, as well as one of the largest ETF trading desks in Canada.

“Today, the industry has a much better understanding of the ETF product and a better understanding on how to use that product in an investor’s portfolio,” says Kevin Gopaul, head of BMO Global Asset Management and the Chair of CETFA. “As we continue to see advisers become more comfortable, we will certainly see the pendulum swing much more towards using ETFs.”

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