National Post (National Edition)
As Canada’s big banks pile into the ETF game, ‘caveat emptor’ becomes watchword.
Canada’s ETF industry experienced a seismic shift in January, when the world’s biggest ETF manager ( BlackRock Inc.) and Canada’s biggest asset manager (owned by Royal Bank of Canada) announced they were teaming up to sell funds under a single, $60-billion brand: RBC iShares.
Since the partnership was announced on Jan. 8, Canadian Imperial Bank of Commerce and National Bank of Canada have launched their own ETFs, meaning that all of Canada’s Big Six banks have entered the ETF market in some way.
Reservations major lenders may have had about lower- fee ETFs eating away at their lucrative mutual fund businesses look to be fading.
“They’ve all come to the conclusion they have to be in the game,” said John Aiken, analyst at Barclays Capital, of the big banks and ETFs.
Just what that means for investors and the banks’ competitors in the ETF space is still being sorted out, but one thing seems certain — the explosion in the number of products being offered is not likely to slow.
As of Jan. 31, there were 679 ETFs with $164.1 billion in assets in Canada, up from 660 funds and $ 156.8 billion in assets at December’s end, according to statistics from the Canadian ETF Association. There was an increase of 110 funds from the end of January, 2018 to the end of January, 2019.
Canadian ETFs also attracted $20 billion in new assets last year, outselling mutual funds for the first time since 2009, a National Bank Financial report revealed.
While choice is generally a good thing for investors, Dan Hallett, vice- president and principal at HighView Financial Group, a boutique investment counselling firm for wealthy Canadian families and foundations, says the sheer variety of ETF strategies out there can be problematic.
“The reason I think that’s a concern is, No. 1, it does make it harder for both the individual investor and the adviser to make good product choices, unless they’re very disciplined,” Hallett said.
That means understanding a range of products that now includes aspects of active management as well as differing fee levels, adding a layer of complexity to the notion of one-stop index investing.
“I think that ETFs may have kind of a halo effect from their early days as ... low-cost disruptors,” said Daniel Straus, vice-president of ETFs and financial products research at National Bank Financial.
“But now, as the lines between ETFs and mutual funds blur, it really kind of behooves investors to do an extra level of due diligence on the ETF.”
There is also the possibility that banks could use their distribution dominance to prioritize their own products over those of outsiders — something that would be nothing new for the financial industry.
A January 2017 consultation paper from the Canadian Securities Administrators, for example, noted that “the majority of mutual fund dealers in Canada are either proprietary- only or are proprietary-focused.”
Raj Lala, president and chief executive officer of Toronto-based Evolve Funds Group Inc., a boutique provider that had approximately $ 400 million in assets under management as of Jan. 10, likened such an outcome to shopping in a grocery store.
“Perhaps your own proprietary products get to be at eye level when you’re walking in the grocery store, instead of near the bottom where you can’t see them, or near the top where you can’t see them,” he said in an interview in January.
Lala, however, also noted the banks have thus far been good about maintaining a “pretty open architecture for all products,” allowing financial advisers independence in deciding what ETF (or other product) makes the most sense for the client.
A more pressing concern for investors may be, simply, money. The growing number of ETFs may make sniffing out decent returns even more difficult.
“Once they have existed for enough time, and enough people have invested in ETFs for a good length of time, I am highly confident that we will see people disappointed with their performance in ETFs, not unlike what has happened in mutual funds over the last 20 years,” Hallett said.
As far as the bank’s competitors go, the BlackRock- RBC tieup “raised eyebrows all over the Street,” according to Evolve’s Lala.
“I’ve ended up getting a few inbound inquiries from some of the big firms that are interested in talking about potential partnerships with a firm like ours,” Lala said. “So clearly there’s a number of organizations out there that want to explore the space a little bit more.”
Others are brushing off the added competition.
Som Seif, founder and chief executive of Toronto–based Purpose Investments Inc., noted that Purpose, which has more than $6 billion in assets under management, has already been competing with some of the biggest firms in the world in the ETF business, including BlackRock. Seif doesn’t see the RBC-BlackRock partnership as being earth-shattering for the business either.
“I think, more than anything else, the signal from RBC is that doing this is very hard as a bank,” Seif said in January. “And I think that for iShares, it’s also recognizing that building a business and having distribution at scale in Canada is very hard as an independent.”
Evolve’s strategy isn’t going to shift too drastically with more big bank activity in the ETF space. Lala said the firm will keep focusing on asset classes that benefit from active management, as well as thematic ETFs, such as the Evolve Cyber Security Index ETF that notched a chart-topping 19.4-per-cent return for investors in 2018.
“I’m a big believer that if you keep bringing good quality product, and your products deliver good results, then you will build a successful company, because ultimately investors make money, the adviser is happy and they support your products,” said Lala.
Those looking to launch ETFs or to further entrench themselves in the business are not assured of easy wins, either. For investors, then, the watchwords may be “caveat emptor.”
“Just because you’re a bank, it doesn’t mean you’re going to be successful,” Seif said.