Canadian ETFs: room for growth

While the Canadian ETF market remains much smaller than its US counterpart, it is growing fast. Clare Dickinson asks the industry about the market and its growth potential

Canada was the birthplace of the ETF when, in 1990, a fund tracking the TSX 35 Index was listed on the Toronto Stock Exchange. This marked the beginning of a fast-growing market, which now has more than US$1.5trn of assets under management globally.

But while the US has more than 30 providers and a long list of potential new entrants, there are just six ETF issuers in Canada, with two more planning an entrance. 

The market is still much smaller than the US in terms of assets and has far fewer products available to investors. US ETF assets sat at $969.4bn at the end of July, according to BlackRock, Canadian assets totalled just $41.6bn.

The growth may be slower in the Canadian market but there are some interesting developments underway. Although there is still only a handful of providers there were only four at the end of last year so this year could see that figure double. Some large institutions are planning to enter the market; Vanguard and Royal Bank of Canada have both filed for approval to list ETFs there.

The Canadian ETF market allows for greater ease of use of derivatives than in the US where approval of new swap-based ETFs has been deferred while the regulator investigates them. In Canada ETFs are considered to be mutual fund trusts and are allowed to use derivatives. 

The market is seeing the introduction of unique ETFs such as covered call ETFs and now the introduction of ETFs with trailing fees should open them up to a raft of new investors as a large chunk of the adviser market operates non fee-based accounts.

ETFM’s Q&A asks the providers about the Canadian market and how it is likely to develop.

 

What is the key to being successful in the Canadian market? 

Michael Cooke, head of distribution, PowerShares Canada: The Canadian ETF industry has seen the number of providers double from four to eight just in 2011. In a more competitive environment, there will be several keys to being successful. If ETF providers do not launch products that are sufficiently differentiated, they will be competing on price in a race to the bottom for ETF management fees. 

Industry sales trends in Canada indicate that fixed income and single long equity offerings are dominating net inflows. Successful providers will need to have a strong complement of solutions in these two categories to be considered core ETF providers. 

ETF providers that can bring next generation products using non-traditional indices across fixed income and equities should enjoy significant growth in the next several years. 

Kevin Gopaul, vice president and CIO, BMO Asset Management: The key to being a successful ETF provider in the Canadian market is truly understanding the client base.  Canadians are conservative, yet very sophisticated investors because of the regulatory environment.