At the end of November, assets under management (AUM) stood at a record level of $145.9-billion, driven by net inflows of $3.3-billion, according to Yves Rebetez, managing director and editor of ETF Insight. The product shelf keeps on expanding and offers more investment choices. As the industry grows, the influx of market players accelerates. Two new providers joined the ETF market, with the number of market players now at 28.
Equium Capital Management Inc. entered the industry by launching ETF series of the Equium Global Tactical Allocation Fund (“ETAC”). The fund invests primarily in a mix of global equity securities, fixed income investments, derivative securities, and money market instruments. The ETF series units charge a management fee of 0.95%. The asset manager is a boutique investment management firm focused on global, multi-asset portfolio solutions.
Arrow Capital Management Inc. also joined the market through ETF series of the Exemplar Investment Grade Fund. Arrow Capital Management is an independent, employee-owned investment firm founded in 1999. It currently manages over CAD $1 billion of assets.
The industry is slowly becoming saturated, resulting in mergers and acquisitions among market players. This month, some of Questrade Wealth Management Inc.’s ETFs were merged into WisdomTree Asset Management Canada, Inc.’s ETFs as the acquisition, announced in July, come into effect.
Several other acquisitions are in the pipeline: Evolve Funds will acquire Sphere Investment Management Inc.’s ETFs and Sun Life Global Investments is set to take over Excel Funds’ ETFs.
NOVEMBER ETF LAUNCHES:
The Canadian industry has come a long way since the days investors would only hold core ETFs in their portfolios. These “core” are broad stock and bond index funds ideal for long-term investments. Today, investors’ demand for niche ETFs causes the product line-up of theme-driven and sector-specific ETFs to expand.
The Mackenzie Global Leadership Impact ETF (“MWMN”) is the latest themed ETF launched. “The ETF seeks to provide capital growth by investing primarily in companies that promote gender equality and women’s leadership, anywhere in the world.” It is the second gender ETF offered in Canada. The Evolve North American Gender Diversity ETF (“HERS”) invests in North American equity securities that have demonstrated commitment to gender diversity as part of their corporate social responsibility strategy.
Niche ETFs allow investors to capitalize on macro trends. In November, Horizons unveiled one such investment solution, the Horizons Robotics and Automation Index ETF (“ROBO”). ROBO tracks the ROBO Global Robotics and Automation Index, an index designed to provide exposure to the performance of equity securities of robotics-related and/or automation-related companies. Other than conventional sectors like financial, energy and metal, the Canadian ETF space also covers the cyber security industry and even the marijuana industry.
AMALGAMATIONS AND NEW ETF LAUNCHES
The surge of exchange-traded funds continues. Assets under management stood at $141-billion at the end of October, driven by strong net inflows. Evolve Funds announced that it will take over the ETF management contracts from Sphere Investment Management Inc. Amalgamations are to be predicted as the market gets progressively crowded. For instance, eight ETF sponsors joined the industry this year.
Evolve Funds entered into an agreement with Sphere to acquire the right to manage Sphere’s five ETFs with approximately $68-million in assets under management, subject to obtaining unitholder and regulatory approvals. Sphere’s ETFs are expected to continue to use a strategy that follows the Sustainable Yield Indices.
OCTOBER ETF LAUNCHES :
The Canadian product shelf is expanding and it is slowly deviating from the core, which was inherent in the rapid growth of the passive industry. 16 new ETFs were issued this month from RBC, BMO, Evolve Funds and Horizons.
BMO introduced five new ETFs. The BMO High Yield US Corporate Bond Index ETF (“ZJK”), started trading at the beginning of October and already attracted $1.18-billion in assets. It tracks the performance of the Bloomberg Barclays Capital U.S. High Yield Very Liquid Index. The ETF is also offered in CAD-hedged units under ZHY. The management fee on both ZJK and ZHY are 0.55% of NAV. BlackRock’s iShares U.S. High Yield Fixed Income Index ETF (“CHB”) tracks the same benchmark and charges only 50 basis points.
Horizons launched the Horizons Active A.I. Global Equity ETF (“MIND”), the World’s first global equity-focused ETF entirely run by a proprietary and adaptive artificial intelligence system. MIND seeks long-term equity returns through investments in major global equity indices using primarily North American-listed ETFs. “MIND is expected to be able to more efficiently process market data and allocate assets than any human manager,” said Steve Hawkins, President and co-CEO of Horizons ETFs. “Unlike today’s portfolio managers who may be susceptible to investor biases such as overconfidence or cognitive dissonance, MIND is devoid of all emotion. It is purely systematic in how it makes investment decisions.” Horizons has more ETFs in its pipeline.
On November 14th, Horizons ETFs Management (Canada) Inc. will launch its first multi-factor ETF, the Horizons Inovestor Canadian Equity Index ETF (“INOC“), sub-advised by Inovestor Asset Management. INOC seeks to replicate, to the extent possible, the performance of the Nasdaq Inovestor Canada Index (“NQICA“). The ETF charges a management fee of 0.50% of net asset value.
The Nasdaq Inovestor Canada Index was designed by Inovestor Inc., an affiliate of the sub-advisor. It uses a quantitative bottom-up model that systematically identifies companies with high levels of economic profit and attractive valuations ranked according to multiple factors, namely; profitability, growth, safety, management quality, reasonable valuations, and shareholders yield. The strategy has outperformed the S&P/TSX (TR) by 7.4% on average since 2008.
“This ETF is the result of our R&D on economic profit factors over the last decade and we selected industry leaders to increase our odds of succeeding with this investable product,” says Francois Soto, Vice-president, Portfolio Management at Inovestor Asset Management. For more information about INOC, please visit their website at https://inovestor.am/etfs/
CANADIAN ETFS: THE LATEST LAUNCHES AND NEW MARKET PLAYERS
Not a day goes by without hearing about exchange-traded funds, whether it be ETF launches or new market players joining the industry. September was one of the busiest months of 2017 so far, with 26 new ETFs and assets under management peaking at $135-billion. The market is increasingly saturated with 27 ETF providers, compared to only 17 for the same period last year. This month alone, three issuers entered the industry – PIMCO Canada, Evolve funds and Galileo Global Equity Advisors Inc.
PIMCO Canada issued ETF series of the PIMCO Monthly Income Fund (Canada) and the PIMCO Investment Grade Credit Fund (Canada). “We want to provide our Canadian investors with additional, convenient access points to two of our most popular bond strategies” said Stuart Graham, Managing Director and Head of PIMCO Canada. Pacific Investment Management Company LLC (PIMCO) is one of the world’s premier fixed income investment managers.
Evolve Funds differentiates itself by focusing on niche markets. Its goal is to bring innovative solutions to Canadian investors. Three of its four ETFs are thematic funds, covering gender diversity, future cars and cyber security. The fund manager recently filed to introduce a bitcoin ETF. U.S. regulators have rejected cryptocurrency ETFs until now. Will Canadian regulators approve the virtual currency ETF?
Galileo Global Equity Advisors Inc., advised by U.S. Global Investors Inc., launched the U.S. Global Go Gold ETF, a smart factor, passively managed fund that is designed to track the U.S. Global Go Gold and Precious Metal Miners Index. The index is designed to capture the performance of companies engaged in the production of precious metals and minerals.
Sun Life Global Investment will acquire Excel Funds and will overlook Excel’s ETF business. Excel Funds joined the industry in May with two global multi-asset ETFs. The funds have not appealed to many investors yet. Sun Life may have a better chance than Excel Funds in attracting assets with their well-established distribution channels.
Competition is also intensifying in the exchange market, which was a monopoly dominated by the TSX for a long time. 25 ETFs are currently listed on Aequitas NEO Exchange, compared to only one in 2016. The underdog has lured six ETF sponsors. Earlier this year, BlackRock switched the listing venue of 5 ETFs from TSX to NEO. BMO launched three U.S. Treasury bond ETFs on the exchange shortly after and just now, RBC introduced its first suite of broad base index ETFs on NEO.
The competitive landscape is driving fees lower. Asset managers race to offer more affordable investment solutions. For instance, Horizons is extending the 4 basis point (bps) rebate on the Horizons S&P/TSX 60 Index ETF (HXT). As such, the effective annual management fee on HXT continues at 3 bps, making it the world’s lowest-cost Canadian Equity ETF. Dynamic Funds and BlackRock Canada’s iShares reduced the management fee of the following ETFs:
Below is a list of ETF listings launched in September:
At the end of August, assets under management (AUM) of Canadian ETFs reached a new record of $133.9-billion, largely due to net inflows of about $3-billion. First Asset expanded their suite of MSCI Index-based ETFs to include RWX, which seeks exposure to stocks across 21 developed markets, excluding the U.S. and Canada. Redwood Asset Management launched its first active emerging ETF.
BlackRock will terminate six ETFs in September. XCR, XGR, XGC, XAL and XBZ are BlackRock’s lowest AUM ETFs, excluding ETFs less than 1 year old. Despite reasonable assets of around $50-million, the iShares BRIC Index ETF will also be terminated. It is yet another red flag suggesting market saturation of ETFs. Funds that do not attract enough AUM to cover costs will presumably be on the ETF deathwatch. Currently, more than 50 ETFs in the Canadian industry do not satisfy the break-even criteria. While large asset managers can cover costs for loss-making ETFs with their Billion Dollar Club ETFs, other providers may have to exit the industry because their ETFs are not profitable.
ETF asset managers are taking advantage of the sluggish summer to revamp their product suites.
Desjardins aligned management fees on DCS and DCG to BlackRock’s XSB and CLF, the lowest fees charged for Canadian Short-Term Bond ETFs and 1-5 Year Laddered Government Bond ETFs. New management fees on the Desjardins Canadian Short-Term Bond Index ETF (DCS) and the Desjardins 1-5 year Laddered Canadian Government Bond (DCG) are 0.09 per cent and 0.15 per cent from 0.15 per cent and 0.20 per cent, respectively. iShares has the first mover advantage and the reputation. Will aligning management fees be enough to lure investors?
BMO announced index changes to the following ETFs, effective on Sept. 5. The ETFs were previously replicating S&P’s equal weight sector indices and will now track Solactive AG’s indices. It’s not the first time that BMO is switching to Solactive indices. In 2016, BMO replaced Dow Jones indices by Solactive indices for ZRE, ZUB, ZUH and ZUT. The competitive environment could be pushing ETF issuers to lower cost in order to provide more cost-effective solutions.
First Trust AlphaDEX Canadian Dividend ETF (FDY) is proposed to merge into the First Trust Canadian Capital Strength (FST), upon approval of unitholders. The proposal will provide several benefits to FDY’s unitholders, including broader market exposure, greater liquidity and tax losses.
Redwood Asset Management is offering an exchange offering for the ETF units of the Redwood Canadian Preferred Share Fund. Investors may purchase units of RPS by tendering eligible securities of Exchange Eligible Issuers. The list is available here.
Kimberly Yip Woon Sun is an ETF analyst with Inovestor Inc.