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Alternative strategies thrive in increasingly competitive ETF market

When looking at yields of various ETFs, make sure read the fine print.

A new report from Bank of Montreal's Global Asset Management group says competition in the Canadian exchange traded fund industry is heating up, with new entrants popping up and larger providers conceding market share.

According to the report, smaller players, which include everyone but dominant fund seller BlackRock Inc., increased their share of Canada's ETF business from 26 per cent to 32 per cent in the first nine months of the year. BMO Global Asset Management issued its bi-annual ETF outlook report on Tuesday.

By BMO's calculations, ETF industry inflows increased by more than $4-billion in the same period. Canadian ETFs now have about $60-billion in assets under management – an increase of 6 per cent. "I think this is an interesting time in our industry and it's very early days in terms of the growth we've seen," said Rajiv Silgardo, co-chief executive of BMO Global Asset Management.

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BMO is now the second-largest ETF seller in Canada by assets. The Globe talked to Mr. Silgardo about the industry trends he's seeing now.

The ETF trend report mentions competition is increasing. Who are your major competitors?

We have lots of competition and a very healthy regard for all of them. [ BlackRock's] iShares is still the largest by far in Canada, and so you have a long ways to go to catch up with them. Vanguard is another name I'm sure you're hearing more and more – they've been here for almost two years now and have been a strong competitor to iShares in other markets. I expect they'll be able to do the same here. And then we have our own home grown competition. We try to understand the competitive landscape and position ourselves to grow properly.

The report says "alternative strategies" will drive asset growth through to 2014. Why is that?

When the industry first got going, ETFs were primarily based on widely disseminated, market capitalization-weighted, benchmarks – equity and fixed income. But over the last five years we've seen the industry evolve into investment strategies and solutions that investors are focused on. Instead of saying 'here's a large, well-known index, let's create an ETF [based] on it,' the industry is now more focused on the outcome the investor needs.

So you've seen things like low-volatility ETFs, covered-call types of strategies focused on income, target maturity bond ETFs that behave differently than regular bond ETFs… all those are based on the result of investor needs rather than underlying ideology.

What about the emergence of hybrid mutual fund and ETF investment products?

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I think we will see more of those, because what's happening is that mutual fund managers and providers are recognizing that they can use ETFs just as easily as individual and institutional investors. For example, mutual fund managers who are strong in domestic equities and fixed income but don't have a lot of experience in emerging markets may choose to use ETFs to fill that sleeve in their portfolio.

Investor education is a theme you think will be important this year – how is that different for ETFs than mutual funds?

Mutual funds have been around for 40 or 50 years now. People generally feel they know enough about mutual funds. ETFs have been around for 10 years, 15 years at most, and are becoming more mainstream, but are still quite small. Investors really need to understand where there are similarities between ETFs and mutual funds and where there are differences.

The ETF industry is young but it has grown pretty quickly, and I think there is a need for the industry to step up their efforts around making sure all this growth is happening in the right way.

ETF fees are increasingly competitive and some providers have repriced products to cater to a fee conscious consumer. Will this continue?

The low cost of ETFs remains very important to investors and is one of the reasons for their strong appeal. But no more or less than we've seen pricing pressure in the other part of the industry.

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What was the most surprising finding that came out of this study?

Through the first half of 2013 when we looked at the flows in the industry, they were primarily in the area of fixed income. And it was almost like a switch had been turned off when U.S. Federal Reserve chairman Ben Bernanke came out and said they might start tapering. The speed with which it happened was very, very interesting.

In Canada we didn't see a big rotation into equities. It was more south of the border where you did see a rotation into equities out of fixed income.

This interview was condensed and edited.

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About the Author
Financial Services Reporter

Jacqueline Nelson is a financial services reporter at the Report on Business. Prior to that she was a staff writer at Canadian Business magazine, covering news and writing features on a wide variety of subjects. More


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