The in­creas­ing va­ri­ety in ETF prod­ucts means they can be used for broad or spe­cific mar­ket al­lo­ca­tions

Investment Executive - - FRONT PAGE - BY JADE HEMEON

The new CETFA chair­man is a pi­o­neer in the ETF business.

with etfs grow­ing rapidly, Kevin Gopaul, re­cently ap­pointed chair­man of the Cana­dian ETF As­so­ci­a­tion (CETFA), says learn­ing how to se­lect and trade ETFs that fit with clients’ fi­nan­cial goals and risk tol­er­ance is be­com­ing in­creas­ingly im­por­tant for fi­nan­cial ad­vi­sors and their clients. In Gopaul’s view, ed­u­ca­tion is es­sen­tial to en­sure the best ex­pe­ri­ence for all par­ties in­volved, from providers to in­vestors.

“If you’re a money man­ager, you’re a risk man­ager,” says Gopaul, age 42, whose pri­mary job is with BMO Global As­set Man­age­ment Inc. (BMOGAM) in Toronto. His ti­tles there in­clude se­nior vice pres­i­dent, quan­ti­ta­tive strate­gies and global ETFs; and chief in­vest­ment of­fi­cer (CIO) for Canada. “ETFs can be an ef­fi­cient tool, but must fit with client ob­jec­tives and time hori­zons. Many in the in­dus­try don’t re­al­ize how much ed­u­ca­tion is needed, and [CETFA] is fo­cused on that.”

Client ser­vice and ed­u­ca­tion re­quires heavy in­vest­ment among ETF providers, Gopaul says. This has been a pri­or­ity at BMOGAM and is some­thing Gopaul will be ad­vo­cat­ing in his role at CETFA. With the ETF in­dus­try still rel­a­tively young, he says, top-notch tal­ent is not easy to find. As the in­dus­try ma­tures and faces in­evitable twists and turns in highly com­pet­i­tive fi­nan­cial mar­kets, hav­ing the right kind of ex­per­tise — in­clud­ing le­gal, prod­uct devel­op­ment, port­fo­lio man­age­ment and client ser­vice — will be a key com­pet­i­tive dif­fer­en­tia­tor for ETF man­u­fac­tur­ers.

“We’ve been for­tu­nate to at­tract top peo­ple. But if you don’t have the right tal­ent, grow­ing the business can be dif­fi­cult, no mat­ter how good the prod­uct is,” he says. “These are nu­anced prod­ucts.”

In ad­di­tion to know­ing your firm’s prod­ucts in­side out, you must be able to an­swer ques­tions about how the ETFs avail­able to your clients com­pare with those of com­peti­tors, which re­quires a de­tailed un­der­stand­ing of port­fo­lio con­struc­tion, Gopaul says. About 25% of the in­quiries BMOGAM re­ceives are about other providers’ ETFs, he adds.

Even if you know the ba­sics of how to trade and use ETFs, more ad­vanced ed­u­ca­tion is use­ful, Gopaul says. BMOGAM of­fers “mas­ter classes” in how to use ETFs for so­phis­ti­cated port­fo­lioman­age­ment strate­gies, such as us­ing ETFs in com­bi­na­tion with de­riv­a­tive ve­hi­cles, as well as to aid in un­der­stand­ing the nu­ances sur­round­ing high-fre­quency trad­ing.

Ac­cord­ing to CETFA fig­ures, there are 514 ETFs, is­sued by 24 Cana­dian prod­uct man­u­fac­tur­ers, which in­clude big banks, in­sur­ance and in­vest­ment fund man­agers, and small in­de­pen­dents. As of July 31, as­sets un­der man­age­ment (AUM) was $130.5 bil­lion, a 23% in­crease year-over-year. Within the past year, the num­ber of ETF providers has jumped by seven to a to­tal of 24 firms, re­flect­ing the hot pace in the ETF mar­ket over the past few years.

“The choice is good, but in­vestors need to un­der­stand what they’re buy­ing and the kinds of ex­po­sures they’re get­ting,” Gopaul says. “If there’s a risk that keeps me up at night, it’s the rapid growth of prod­uct providers that are not ex­pe­ri­enced in the ETF business. If some­thing goes wrong, the en­tire in­dus­try will be painted with the same brush.”

Al­though the growth of the ETF in­dus­try has been strong, ETF AUM still is dwarfed by mu­tual funds’ AUM of $1.4 tril­lion, as mea­sured by the In­vest­ment Funds In­sti­tute of Canada.

The trad­ing of ETFs is re­stricted to ad­vi­sors at firms li­censed by the In­vest­ment In­dus­try Reg­u­la­tory Or­ga­ni­za­tion of Canada (IIROC); firms that are mem­bers of the Mu­tual Fund Deal­ers As­so­ci­a­tion (MFDA) are un­able to ac­cess se­cu­ri­ties ex­changes on which ETFs trade. Al­though a cou­ple of MFDA firms of­fer ETFs through re­la­tion­ships with sis­ter firms that are IIROCli­censed, a broad in­vest­ment in­dus­try so­lu­tion to open­ing up ETF trad­ing has been elu­sive.

“As dis­tri­bu­tion con­tin­ues to evolve, a so­lu­tion will sur­face that will al­low MFDA firms to of­fer ETFs,” Gopaul says. “Pro­posed so­lu­tions may l ook sim­ple on pa­per, but, in prac­tice, they would take a lot of lev­els of co-or­di­na­tion to make them work, based on the in­fra­struc­ture re­quired and the li­cens­ing [an in­vest­ment deal- er] has. Dis­cus­sions are con­tin­u­ing and [CETFA] still doesn’t know what the end so­lu­tion will be, but we are sup­port­ive of in­no­va­tion.”

Gopaul, who has al­most 20 years of ex­pe­ri­ence us­ing ETFs, is a true pi­o­neer in the in­dus­try. ETFs first came to his at­ten­tion in 1998, when he took his first job in the fi­nan­cial ser­vices sec­tor, join­ing State Street Corp. in Toronto as a mu­tual fund val­u­a­tor af­ter study­ing eco­nom­ics, fi­nance and com­puter sci­ence the Univer­sity of Waterloo in On­tario.

A year later, work­ing as an as­pir­ing young eq­ui­ties port­fo­lio man­ager for Clar­ica Life In­sur­ance Co. in Waterloo, Ont., Gopaul sought an ef­fi­cient way to achieve broad eq­ui­ties mar­ket ex­po­sure and found a so­lu­tion in ETF-like Toronto in­dex par­tic­i­pa­tion units (a.k.a. TIPs), which ac­cessed the top 35 stocks on the Toronto Stock Ex­change (TSX) and were, in ef­fect, the orig­i­nal ETF. He also used an­other early ETF: high-in­come, pass-through se­cu­ri­ties (a.k.a. HIPs), which ac­cessed the top 100 stocks on the TSX.

Along with a fam­ily of ETFs of­fered by Toronto-Do­min­ion Bank, these early ETFs pro­vided pas­sive stock mar­ket ex­po­sure at low cost, thereby en­hanc­ing Gopaul’s over­all re­turns when com­bined with ac­tive port­fo­lioman­age­ment strate­gies.

Gopaul’s next job was back in Toronto as a trader in in­dex ar­bi­trage for Sco­tia Cap­i­tal Inc., where he stayed for about a year. He then re­turned to his “call­ing of man­ag­ing money,” as he puts in, join­ing Bar­clays Global In­vestors Canada Ltd. in 2004, for which he over­saw the man­age­ment of ETFs and in­sti­tu­tional man­dates. Bar­clays was cap­i­tal­iz­ing on the fact the large pas­sive business be­ing done by in- sti­tu­tional funds could be broad­ened to the re­tail au­di­ence, Gopaul says.

Bar­clays’ iShares divi­sion man­aged iShares S&P/TSX 60 In­dex ETF, cre­ated in 2000 from the merger of TIPs and HIPs, now is the largest ETF in Canada, with AUM of more than $11 bil­lion. Gopaul was prin­ci­pal and port­fo­lio man­ager at Markham, Ont­based BGI Bench­mark Group In­ter­na­tional when he left to join BMOGAM in 2009 as a con­sul­tant to help launch Bank of Mon­treal’s ETF business. He put on his “port­fo­lio-man­age­ment hat” when BMOGAM’s ETFs were launched, be­com­ing CIO and, later, tak­ing on his other ti­tles.

With the in­dus­try now of­fer­ing an in­creas­ing ar­ray of strate­gies, from plain-vanilla pas­sive to rules-based and fully ac­tive, Gopaul says, ETFs have the abil­ity to tar­get broad mar­ket ex­po­sures as well as more tar­geted strate­gies in both fixed-in­come and eq­ui­ties mar­kets.

Gopaul views ETFs as be­ing com­ple­men­tary to mu­tual funds rather than an ei­ther/or choice. He says ETFs now are used within di­ver­si­fied port­fo­lios even by mu­tual fund port­fo­lio man­agers, as well as by other in­sti­tu­tional port­fo­lio man­agers and re­tail clients. He views ETFs as an at­trac­tive al­ter­na­tive to the use of sin­gle se­cu­ri­ties for achiev­ing al­lo­ca­tions to spe­cific mar­ket seg­ments — such as a high-yield com­po­nent within a fixed-in­come port­fo­lio or Europe-based equity within a global stock port­fo­lio.

“ETFs can be out­come-ori­ented, fo­cus­ing on pre­cise ob­jec­tives, such as low volatil­ity, high yield, growth, value, mo­men­tum or qual­ity,” he says. “How­ever, the port­fo­lio needs to be tilted.”

Rapid growth can lead to providers that lack knowl­edge


Kevin Gopaul, who has been in­volved with ETFs for 20 years, is the new chair­man of the Cana­dian ETF As­so­ci­a­tion.The BMO Global As­set Man­age­ment Inc. ex­ec­u­tive says a key chal­lenge for ETF providers will be find­ing top-notch tal­ent, given the in­dus­try’s...

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