Exchange-traded funds are growing robustly. The two main suppliers of ETFs in Canada are locked in an epic battle for market share.
Blackrock, supplier of the popular iShares ETFs, which have dominated the market for nearly 20 years, is facing a serious rival for the first time. BMO ETFs are shattering sales records month after month, and are nearing top ranking in terms of assets under management. The September issue of Canadian ETF Flows, published by National Bank Financial, reports that iShares sustained fund outflows of $1.151 billion, while BMO garnered $292 million.
This is clearly a two-player contest. With $56.7 billion in assets, iShares has a market share of 41.9 per cent, while BMO has $42.7 billion in assets and a 31.6 per cent market share. Vanguard ranks third, with a 9.3 per cent share of the ETF market, and assets of $12.6 billion. Several small players are also growing vigorously. RBC ranks fifth, with $3.7 billion in assets and a 2.7 per cent share. Its sales reached $263 million in September, for growth of 7.9 per cent.
Invesco, a prominent player in the independent distribution network, holds down sixth place. Since entering the market in 2009, the same year as BMO, Invesco saw BMO’s ETF rapidly outpace its own PowerShares offering. “We saw some progress since 2009, but BMO’s offer is much vaster in Canada (the PowerShares brand is also sold in the United States). In addition, we distribute our products in the independent network only, while BMO is in both this network and the bank network,” Alain Huard, vice president Retail Sales, Quebec, of Invesco Canada explains.
BMO has invested a great deal in marketing its ETF offering, says Alain Desbiens, regional director Eastern Canada, BMO ETFs, BMO Global Asset Management. “Over the years, we did many road shows, and gave all the advisors ongoing training in the ETF sector,” he says.
On top of that, BMO has been extremely active in the market. In addition to giving many presentations, the bank also created numerous paper and digital tools on ETFs. Desbiens says his seasoned team has wide-ranging expertise. “Our 28 regional vice-presidents and seven ETF specialists are popularizing the ETF offering, strategic and tactical ETF mutual fund portfolios and segregated funds.”
“We have been the ETF sales leader in Canada for over six years,” Desbiens adds. The potential for the ETF sector in Canada is immense, in both the retail and institutional markets, he says. “Over 30 per cent of our sales are to institutional investors. We want to expand our retail and institutional services.”
Future expansion assured
With 26 players on the roster as of Sept. 30, the ETF market is still much smaller than that of mutual funds, Desbiens points out. But for how long? “The ETF sector is growing quickly and more organically (number of players rising and consolidation among the smaller market players). This trend should accentuate. Our figures show that only 3 per cent of Canadian assets are invested in ETFs, compared with 35 per cent in mutual funds,” Desbiens says.
Research firm Strategic Insight confirms the enthusiasm for exchange-traded funds. Benjamin Reed-Hurwitz, senior analyst, and Megan Cobb, analyst and expert in exchange-traded funds, discussed this topic in an interview with The Insurance and Investment Journal. “In the first part of the year, 67 new ETF funds were launched, which is the highest number on record for two quarters,” Cobb says, adding that six new suppliers emerged in the market during this period, “which I think is more than any other year, in total.”
Twenty-four ETF promoters operated in Canada as of July 31, 2017, seven more than a year earlier, Cobb adds. 514 different ETFs were offered as of that date, up 86 from the previous year, according to data that Strategic Insight gave the Canadian ETF Association (CETFA) via its ETF Insights department. CETFA compiles monthly and quarterly reports on ETFs, to which Cobb contributes regularly.
According to the report Canadian ETF Flows, published by National Bank Financial, 30 ETFs were launched in the month of September alone, which is another record. This brings the total number of ETFs in Canada to 600. The supplier ranks have expanded to 26.
“ETFs are growing incredibly quickly, about double the pace of mutual funds. In July 2017, ETF assets were at $130.5 billion in Canada, up 23 per cent since 2016. In June 2017, their one-year asset growth was about 27 per cent,” Cobb says. In August, ETF assets rose to $133.9 billion, Strategic Insight data confirms.
By comparison, mutual fund assets totalled $19.4 billion in December 2008, she adds. In 10 years, annual asset growth averaged 22.9 per cent. “They have definitely picked up a lot of pace in the last few years, and their assets have grown month over month for a very long streak. Markets were not great last July, and that led to a small decrease, but they will continue to grow quickly for the next few years,” Cobb explains.
Individual market upsurge
All the same, $133.9 billion is paltry compared with the $1.5 trillion in mutual fund assets, the two analysts say. “ETFs are still a small portion of the investment funds market, compared to mutual funds. There’s still place for growth, but it doesn’t mean they are going to catch up with mutual funds, or replace them,” Reed-Hurwitz says.
This growth reflects both a rise in demand for ETFs among individual investors and the fact that ETFs are coming from far behind. “ETFs are starting from a much smaller base than mutual funds. In absolute terms, mutual funds’ growth is much bigger,” Reed-Hurwitz says.
The analysts confirm that the institutional market holds a 35 per cent share of ETF assets versus 65 per cent for the individual market. “It hasn’t changed much since we’ve been tracking their results. ETF assets will continue to grow, but I’m not sure how much more of a share the retail market will actually capture,” Cobb says.
The ETF landscape has changed substantially over the years. In 2001, the market had been mainly made up of Canadian equity index funds, but ETFs based on US and international equity grew sharply, along with bond funds, the August 2017 CETFA report confirms.
Investors are also seeking more active management, especially managers who go far beyond simply shadowing the index. Franklin Templeton Investments’ website explains that the manager of the two smart beta ETFs launched in June 2017, Franklin LibertyQT US Equity and Franklin LibertyQT International Equity Index, uses a rule-based investing methodology. The two ETF funds generally try to surpass the index return by weighting stocks roughly equally, rather than according to their market capitalization.
Several new suppliers are seizing the opportunity of offering more active indices: Desjardins Global Asset Management and Manulife Investments launched multifactor index funds in April. Multifactor analysis considers factors that drive higher expected returns, such as company size, relative price and profitability, Manulife says (see p.12 to learn more). The sixth largest player in the ETF market with PowerShares, Invesco has offered smart indices since it entered the market in 2009, and has intensified this strategy to stand out. “We concentrate on smart indices. This is a small but expanding market. We bought Guggenheim in the United States, which manages $36.7 billion with an approach called equal-weight: you take the S&P500 index and give each stock a 1/500 weighting,” Alain Huard explains.
BMO also emphasizes its presence in the smart ETF niche. "We strongly believe in more active management indices and in smart betas. From the start, we have aimed to create an innovative life of ETF solutions on both the index side and the smart beta side. BMO ETFs currently control more than 50 per cent of the market in smart beta smart beta and active management ETF sectors in Canada," Desbiens says.
He says that more and more advisors are integrating index and smart beta strategies in their portfolios. “These ETFs let them offer their clients funds based on factors that target low volatility, quality stocks. They emphasize dividend or option factors, which provide optimized tax efficient income,” he adds.