Consolidation in the exchange-traded funds industry would be a healthy development for retail investors, particularly in high-risk investment categories, industry executives say.
“We have too many products that are not healthy for clients and too many manufacturers that are not bringing enough to the table to add value to your business,” said Christopher Doll, vice-president of ETF sales and strategy at Invesco Canada. “Especially in light of the fact that we will likely see the entrance of the remaining banks, the insurers and the integrated asset managers that are already in this space coming to market.”
Mr. Doll, who spoke on a panel about the future of ETFs at the Inside ETFs conference in Montreal last week, said there have been several examples over the past year of products that the industry could do without. In particular, he pointed to the volatility-linked funds – known under the ticker VIX and often referred to as Wall Street’s “fear gauge” – products that saw most of their assets wiped out in less than a day when the Dow Jones Industrial Average fell 1,175 points, or 4.6 per cent, on Feb. 5.
ETF products tied to the VIX are extremely complex. Many are leveraged ETFs, which magnify exposure to an underlying index and typically aim to deliver two or three times the return.
“This is an example of where ETFs have, in theory, been developed with the right intention in mind, but not necessary delivered on their job,” Mr. Doll said. “Inverse leveraged or 2x bull ETFs are examples of products where, if you are not on top of your model, and trade them irregularly, you could find yourself with an experience that you did not intend to have with that investment.“
In addition to consolidations or closings of funds among the more than 600 ETF products in Canada, individual ETF issuers will continue to experience competitive pressures when it comes to fees, said Michael Cooke, senior vice-president and head of exchange-traded funds at Mackenzie Investments.
“There is a lot of product and issuers in the marketplace today, and I think some are going to find that the barriers to success are higher than they thought. We are still in the early innings of the growth of the industry, but you certainly want to make sure you have a dedicated and coherent strategy in order to be successful,” he said.
“Access to scale and distribution, alongside investment management, are the key principal ingredients for any successful ETF player in the Canadian market.”
Mr. Cooke said he keeps a close eye on the competitive pressures coming from the more traditional investment fund side of the landscape, where they are experiencing operational and pricing conversions – especially in the form of bulk tradable F-series mutual funds.
Innovative products, such as platform-traded funds (PTF) – mutual funds that include aspects of exchange-traded funds – are also attributing to a drop in fee prices, he added.
PTFs are designed for fee-based investors who work with either discretionary or non-discretionary advisers, and transact and settle similarly to ETFs. Advisers can place a PTF order through an equity-trading platform as they would an ETF or a stock, using a PTF ticker symbol. But, unlike an ETF, there are no minimum-investment requirements with PTFs, and orders are filled at end-of-day net asset value, therefore avoiding bid-ask spreads.
Other product solutions that will be continue to gain traction in the future for both financial advisers and for retail investors to access directly are the “one-ticket solutions”, said Atul Tiwari, managing director and head of Vanguard Investments Canada Inc., who launched a similar product earlier this year.
“Our product philosophy is around building long-term products,” Mr. Tiwari said. “We have never been about the esoteric headline-grabbing products. When we think of innovation, it isn’t just about the product, but it is about how the product is delivered to investors.”
In February, Vanguard Canada launched three “one-ticket-solution” balanced ETFs. Each of the three Vanguard funds invests in seven of the company’s own ETFs covering Canadian, U.S. and international bonds, as well as the shares of large, medium and small companies in Canada, the United States and in both developed and emerging markets around the world (there are no additional costs for the underlying ETFs).
There is a lot of product and issuers in the marketplace today, and I think some are going to find that the barriers to success are higher than they thought. We are still in the early innings of the growth of the industry, but you certainly want to make sure you have a dedicated and coherent strategy in order to be successful.— Michael Cooke, senior vice-president and head of exchange-traded funds at Mackenzie Investments
The portfolios are then automatically rebalanced to keep the target mix intact – similar to an online portfolio manager or robo-adviser platform.
Mr. Tiwari says the company had been looking at various asset-allocation solutions for several years and almost launched the funds two years ago before realizing that the industry wasn’t quite ready for such products.
Now, over the past year, the company refocused on launching the products and, since February, has seen more than $500-million in investment flows into the funds.
“For us, the really interesting thing has been around the number of advisers who have been using the asset-allocation product as the core solution of their portfolio,” Mr. Tiwari said. “As well, for the adviser’s lower-balance accounts, we have seen advisers shifting them into the one-ticket solution.”
Mr. Tiwari said this is an area that Vanguard will continue to explore and expects to see future product emerge.
The push for greater access of ETFs to all Canadian advisers will be key to industry growth, said Florence Narine, senior vice-president and head of product at AGF Investments Inc.
Currently, mutual-fund licensed representatives are able to trade in exchange-traded funds that meet the definition of a mutual fund under securities legislation but do not have access to a securities exchange to purchase the ETFs.
The industry has been working on several solutions to allow the approximately 83,000 mutual fund reps access to ETFs.
“When you look at advisers today, there is still a huge segment of the adviser population – either through the dealer challenges or registration of their particular license – that precludes them from accessing ETFs so that will be a huge market once those types of challenges have been unlocked, “ Ms. Narine said. “As a result, we will see a great deal more assets grow into the ETF space, particularly as asset allocation and portfolio construction gets a little more refined.”
Ms. Narine also pointed to the innovation of funds that will emerge as the adviser and investor base expands in Canada.
“The rules continue to change in what we as manufactures can manufacture in an ETF,” she added “I am looking forward to that evolution to provide greater access to more esoteric spaces but with a bit more of a cushion around the risk parameters, like long/short strategies, and infrastructure.”