Horizon lists ETFs which pay trailing fees

Canadian ETF provider Horizon has launched adviser class versions of four of its ETFs in a bid to attract advisers which work on a commission basis.

The new classes of the ETFs, which listed in Toronto last week, will pay a 75 basis point annual trailing service fee. Horizon is the third Canadian ETF provider to add this feature to its products.

"We resisted this move for a long period of time but the fact of the matter is that in the Canadian market place there is a big component of the advisory channel which gets paid service fees on mutual funds or structured products," says Howard Atkinson president of Horizon ETFs in Toronto.

"They don't operate a fee-based account model. We heard from these advisers that ‘I love your ETFs but I need to be paid and I need a service fee'."

The ETFs which now have service fee paying versions are Horizons Enhanced Equity Income ETF, Horizons Enhanced Income Financials ETF, Horizons Enhanced Income Energy ETF and Horizons Enhanced Income Gold Producers ETF.

They are all actively managed ETFs and Atkinson says the company has no intention of introducing this feature to its passive ETFs.

"Our reasoning is that they are competing with mutual funds which is a C$750bn industry in Canada. The vast majority are actively managed and have service fees attached if you do it through an adviser. We are on par with them."

The fees on the ETFs are either the same as or lower than those on mutual funds. "In the mutual fund world in Canada the standard is 1% service fee on equity funds, 50bp on fixed income funds. The precedent set on the ETF space for equity funds is 75bp (a little cheaper than mutual funds) and 50bp for fixed income funds; that is where we have settled."

Currently just less than $1bn of Canada's $42bn ETF assets are trailer fee-based, says Atkinson. Most of those are passive funds.

He notes the recent McKinsey report which predicts that the US actively managed ETF industry will climb to $1trn within a decade.

Atkinson says that the size of the Canadian market is about 10% of the US market, meaning there could be $100bn of assets in actively managed ETFs in Canada within 10 years, "a good chunk of that is sold by advisers who want service fees".

Whereas the Australian and UK markets are moving towards removing commission in favour of upfront fees, the Canadian market is unlikely to follow suit, says Atkinson. This means that the rest of the ETF market in Canada may head towards offering trailing fees.