The granddaddy of Canadian exchange-traded funds is showing its age.
The iShares S&P/TSX 60 Index ETF – the oldest ETF in the world and the largest in Canada – has been bleeding assets as domestic investors move to cheaper alternatives and foreign investors turn away from Canada.
Once the only game in town for low-cost, one-stop, diversified exposure to the Canadian stock market, XIU is steadily losing market share as fees on newer ETFs shrink toward zero.
“The spreading concentration of ETF assets in my mind speaks to a healthy and maturing ecosystem,” said Daniel Straus, head of ETF research and strategy at National Bank Financial.
Less healthy, perhaps, is the portion of XIU outflows attributable to negative sentiment toward Canada stemming from the pipeline predicament, real estate prices and household indebtedness.
The ETF was hit with its first wave of redemptions starting in 2014, which coincided with a severe global oversupply of crude oil and steep losses in energy prices. In mid-2017, the outflows resumed, and haven’t really stopped since.
XIU’s assets under management are now down by about 30 per cent over the past five years, shrinking the fund to about $9.1-billion – still Canada’s largest, but not for long at this rate.
At one time, XIU accounted for about 25 per cent of all assets in Canadian-listed ETFs. Its share of the market is now about 5 per cent, as other funds charge far less for similar broad-based exposure to Canadian stocks.
XIU has a management expense ratio of 0.18 per cent. That’s three times the fee investors pay for other funds tracking the S&P/TSX Composite Index offered by Bank of Montreal, Vanguard and BlackRock, all of which have an MER of just 0.06 per cent.
Those three funds together have taken in $5.7-billion of investor money over the past three years, while XIU has seen net outflows of $3.3-billion over the same time. “People making longer-term bets on Canadian equity just prefer a lower-cost vehicle,” said Rob Duncan, a portfolio manager at Forstrong Global Asset Management.
In its earlier days, XIU’s fees were a lot more competitive. In 1990, its predecessor, the Toronto 35 Index Participation Fund, was listed on the Toronto Stock Exchange, setting the prototype for what would become a global investing phenomenon. As a result, XIU can claim the title of the world’s first successful ETF.
Meanwhile, BlackRock has had little incentive to reduce XIU’s fees, as long as investors have been happy to pay.
“When you have a legacy ETF with huge assets, you’re not going to kill the goose that lays the golden egg by slashing its fee,” Mr. Straus said. Instead, BlackRock introduced a cheaper alternative in line with the rest of the market, iShares Core S&P/TSX Capped Composite Index ETF (XIC).
For investors outside of Canada, XIU remains the vehicle of choice for trading the Canadian market, also making it a proxy for foreign investor sentiment, Mr. Duncan said. “As a global investor, when you look to particular countries for their exposure, you look for the largest ETF on the exchange. And if I’m risk-off Canada, that’s what I would sell,” he said.
Foreign institutions also tend to prefer XIU for its liquidity.
Big banks, hedge funds and algorithmic traders use it as a tool to move vast sums of money over short periods of time, often in options and futures strategies. That can cause enormous fluctuations in XIU’s assets. The last week alone, for example, has seen net outflows of $1.2-billion.
But XIU may not remain the preferred ETF for institutions forever. As other Canadian ETFs expand at the expense of XIU, they are assuming similar characteristics. “Now we’re starting to see those products at a similar deep level of liquidity as their institutional grandparents,” Mr. Straus said.
And no investors, retail or institutional, prefer paying higher fees when they can get what is essentially the same product more cheaply.