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BlackRock deal creates ETF powerhouse in Canada

BlackRock Inc. is forging ahead with ambitious growth plans for the Canadian market, striking a deal for Claymore Investments Inc. that unites the country's top two sellers of exchange-traded funds.

The deal between BlackRock, the world's biggest asset manager, and Claymore comes just after U.S. fund powerhouse Vanguard Group Inc. made its assault on Canada last month with its first suite of low-fee ETFs that compete directly against BlackRock's iShares offerings.

Competition in the fast-growing ETF business is becoming fierce. The number of players has more than doubled in the past year and Canada's banks, which have a reputation for quickly dominating markets that they enter, are increasingly interested.

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It's a pivotal time because the industry has overcome the early stage of investor confusion.

"It was just a few years ago when we were doing a lot of describing what an ETF was, and really trying to get the world to know about the product and what it was and where it fits in," said Mary Anne Wiley, a managing director at BlackRock who heads its ETF business, known as iShares, in Canada. "We're past that conversation now."

Now players are jostling for market share and developing new products they hope will lend them an edge.

BlackRock's Canadian unit has always been the industry leader by a wide margin, but the acquisition of Claymore, announced Wednesday, now means that it now has 85 per cent of the market, with $36-billion in assets.

"It looks like BlackRock is not giving up its turf as Vanguard moves into Canada," said John Gabriel, an ETF strategist with Morningstar Inc.

Toronto-based Claymore was a unit of U.S.-based ETF provider Claymore Group Inc., which was acquired by New York-based Guggenheim Partners LLC in 2009. The Canadian unit, built up by its entrepreneurial chief executive officer Som Seif, was put up for sale last fall.

Terms were not disclosed for the transaction, which is set to close at the end of the first quarter. BlackRock, which is paying for Claymore in cash, expects the deal to have either no impact or only a small positive impact on earnings this year.

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"Clearly, iShares in Canada remains the biggest [ETF] kid in the playground" and has more product ammunition to compete against the broader Canadian mutual fund industry, said Dan Hallett, a fund analyst with HighView Financial Group.

Some Canadian mutual fund players, including Bank of Montreal and Royal Bank of Canada, have entered the ETF space, and can now offer investors a gamut of products.

And BlackRock, which filed with regulators in the United States to introduce actively managed ETFs there, is aiming to broaden its product line.

"It's about product breadth, and the ability to get out there as a better-equipped fund company against a lot of the big, well-established mutual fund companies," said Ms. Wiley.

In a bid to increase its customer base, BlackRock signed a deal last year with a unit of Sun Life Financial Corp. to help it manage some mutual funds that are sold to directly to the insurance firm's clients.

BlackRock's acquisition is the second purchase of a Canadian ETF provider in recent months. Last November, South Korea-based Mirae Asset Global Investments Co. closed a deal to buy 85 per cent of Toronto-based Horizons ETF Management Inc., formerly known as BetaPro Management Inc., for $127.5-million.

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"The [Claymore] deal points to the need to get bigger in the ETF space" because smaller players not only have to compete against BlackRock, but other financially strong ETF providers, such as Vanguard and some of the banks, said Horizons president Howard Atkinson. "That is why we did our deal with Mirae."

Claymore's Mr. Seif, who used to extol the virtues of his firm's ETFs over the iShares brand, sees BlackRock as a "logical partner for the transaction given the complementary nature of our businesses."

Claymore ETFs track indexes based on "fundamental" factors, such as cash flow and dividends, while Blackrock's focuses on market-capitalization weighted indexes.

"Claymore also has a more general retail approach to our business, while iShares is more institutionally focused," Mr. Seif said of the marriage. "I think those two really work together, and fill gaps in our offerings."

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