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Canada's largest mutual-fund firms turn to ETFs

After years of being on the sidelines, Canada's largest mutual-fund players are now racing to offer exchange-traded funds in an effort to capitalize on the explosion in popularity of the lower-cost products. But they are facing a dual and formidable challenge: how to attract new investors in an already-saturated market while also ensuring they are not sabotaging the success of their existing fund offerings.

Over the past year and a half, seven of Canada's largest asset managers – including Mackenzie Financial Ltd., AGF Management Ltd. and Manulife Financial Corp. – have decided to step out of their comfort zone to add ETF products to their fund lineups. In addition, three smaller mutual-fund providers have also entered the ETF space.

Currently, there are 24 ETF providers in Canada managing $130-billion in assets, according to a recent report by National Bank Financial. That is up from only 10 providers managing $97-billion in assets in April, 2016. Last month, Franklin Templeton Investments and Excel Funds Management became the latest firms to join the growing roster of ETF providers in Canada.

When early ETF providers, including Blackrock Canada Inc. and the Vanguard Group, first launched in the Canadian marketplace, the majority of Canada's asset managers were hesitant to enter an area they thought would cannibalize their No. 1 product – the mutual fund. The rapid adoption of ETFs in Canadians' portfolios in recent years have them reassessing those risks.

"When you look back to the time before we got to market, we did a lot of analysis around the potential risk of cannibalization and it was a valid concern," says Michael Cooke, senior vice-president and head of exchange traded funds for Mackenzie Investments, which launched its ETF fund family last spring. "Many of those concerns have been allayed by the fact that we are really catering to a new client segment and many of those clients are seeing the relevance of what we are doing with the ETF product."

Mutual-fund assets continue to dominate the Canadian marketplace, with $1.4-trillion in assets under management as of April, 2017, according to the Investment Funds Institute of Canada.

But there have been some recent signs their grip on the market is loosening. Total net sales in April were $2.73-billion, roughly half of the net sales of $5.76-billion the previous month. Meanwhile, the ETF market is rapidly gaining momentum. Last month, Canadian ETFs had net inflows of $3.7-billion – one of the highest months for inflows ever.

"ETFs have weathered multiple crises and controversies, but their asset gathering has not slowed down," says Daniel Straus, research analyst with National Bank Financial (NBF). "Mutual-fund companies are finally awakening to the idea that they could offer a form of convenience and accessibility that their clients desire."

With early ETF providers dominating the market with low-cost passive investing, there is limited opportunity to capture passive market share. Instead, the majority of the fund companies entering the market this year are doing so with niche product offerings that are either actively managed or strategic beta funds.

Changing landscape

Unlike a traditional ETF that follows a certain index, actively managed ETFs are more like mutual funds, with their own dedicated portfolio-management team. Strategic beta funds, also known as factor-based funds, follow an index but have active managers who can change the mandates or investment strategies when needed.

The surge in actively managed ETFs also means higher management fees charged for portfolio-management services. Management fees can range between 0.40 per cent to 0.95 per cent – much higher than some index ETFs that can charge as low as 0.07 per cent. But as the competition continues to emerge, fees could start to drop.

"Product growth has accelerated this year with much of that being driven by actively managed ETFs, which include a variety of different approaches and styles," says Atul Tiwari, chairman of the Canadian ETF Association. "We see that trend continuing with room for additional growth, as investors and institutions look at replacing their higher-cost active exposure with lower cost actively managed ETFs."

Seeking lower-cost alternatives is a direct response to a changing landscape in the Canadian market. Recent regulatory changes have sparked a growing awareness around investment fees and the cost of advice. As a result, investors – as well as financial advisers who make up a large percentage of mutual-fund sales – are increasingly adopting ETFs in their investment portfolios.

Earlier this year, AGF entered the scene with a big splash – adding seven actively managed ETFs to their product lineup. The funds – branded AGF Quantshares – currently have $122-million in assets under management. Like many of AGF's competitors in the mutual-fund space, the company won't veer from its actively managed philosophy.

"Passive investing is not something AGF will be looking at," says Kevin McCreadie, president of AGF Management. "There is no value in bringing passive investments to the landscape. This is a landscape that is increasingly going to migrate towards active [management] and when you look at the type of innovative products we just launched, there are going to be more of these product initiatives being offered over the next two to three years."

Through its affliliates, Highstreet Asset Management Inc. and Boston-based FFCM LLC, AGF has set up a group of investment professionals who customize investment strategies for clients in a range of market exposures including domestic and global equities to income-generating and balanced strategies.

Blurring the lines

Excel funds entered the ETF industry last month with two actively managed ETFs – Excel Global Balanced Asset Allocation ETF and Excel Global Growth Asset Allocation ETF. Subadvised by Alken Asset Management Ltd., the funds are a big departure from the company's popular emerging-market mutual funds.

"These funds are radically different from what we are known for and that was the reason why we launched them," says Christine Tan, chief investment officer at Excel funds. "We want our ETFs to be a shade different from our active [mutual fund] platform, where we focus on active management to generate alpha in emerging markets. Our view on global markets – and our global ETF products – is that achieving attractive returns over the cycle globally is more about asset allocation and risk management."

A number of ETF providers are pursuing other strategies. Some larger fund companies with substantial distribution networks and prominent brands, for instance, are blurring the lines between mutual funds and ETFs by creating wraps so that the products can co-exist.

BMO Asset Management already packages its ETF products in a mutual-fund wrapper to sell in its BMO bank-branch locations. These products, which have higher costs than just the ETFs themselves, make up $6-billion of BMO's ETF assets.

Similar to BMO, TD Asset Management has packaged their ETF products into a D-series mutual fund, which are targeted toward do-it-yourself investors and carry a higher management fee.

Meanwhile, for the first time, mutual funds are also being wrapped into ETFs. Bank of Nova Scotia's Dynamic Funds recently partnered with BlackRock Canada's iShares to launch five actively managed funds. The partnership is a first of its kind for BlackRock, which already dominates the ETF market with $56-billion in assets. The Dynamic iShares ETFs invest in corresponding, "underlying" Dynamic mutual funds that are only available to iShares and are not accessible to the general public, according to a NBF research note.

"This is the first time we have seen an ETF wrapping mutual funds," Mr. Straus wrote in a note. "While the dual-layer structure may seem complex at first blush, the user experience and implications are similar to traditional actively managed ETFs, of which there are many in Canada."

Manulife has taken yet a different approach. Rather than overlapping its ETFs and mutual funds, it found a partner to enter the ETF space with.

Hoping to build upon the success it had with mutual-fund subadviser Mawer Investment Management, Manulife partnered with Dimensional Fund Advisors Canada ULC and in April launched four multifactor ETFs. As such, the ETF platform is headed in a different direction than the company's actively managed mutual funds, says Krista Matheson, head of ETFs and structured products at Manulife Investments. It will also open the door to providing a product that is widely used by licensed securities advisers.

Crowded market

"It is not our philosophy to add to passive investing and a lot of [ETF] assets were going that way during that time," Ms. Matheson says. "We were pretty careful before we got into the business and one of the things we wanted to have in place was a strong partner so that we weren't just launching an extension of our mutual-fund offering."

Manulife first started looking at ETFs back in 2010, the year Bank of Montreal launched its ETF platform, which has since grown to become the second-largest ETF provider in Canada with more than $40-billion in assets under management. Ms. Matheson says Manulife decided against launching back then so that it could study launching alternative investment products that didn't include a passive investment strategy.

Despite these industry initiatives, the majority of assets are still moving to low-cost and broad-based passive ETFs, says Mr. Tiwari of the Canadian ETF Association.

It's that crowded passive-market segment that TD Asset Management took on when it launched six index ETFs last year. This wasn't the first time TD has entered the marketplace. It first launched ETFs back in 2001, but exited the business in 2006 owing to low trading volumes. Growth has been slow this time around as well; it currently has just under $100-million in assets under management. But the company didn't want to stand idly by given the demand now being seen in the marketplace for additional investing options.

Whether TD will eventually move into the rapidly growing active-ETF space is unknown. Bruce Cooper, CEO of TD Asset Management, says it isn't something they are looking at right now.

"We are in the active business so we would consider it but we haven't gone there yet," Mr. Cooper says. "We think passive and active [investing] both have a role to play in a client's portfolio and fundamentally we think those capabilities are more important than the packaging. We are already offering our clients those capabilities through our mutual-fund platform, which is a huge business for us."

RBC Global Asset Management already made the switch after launching in 2011 with a series of plain vanilla-bond ETFs. After a few years of lacklustre growth, the company launched its actively managed Quant dividend equity ETFs in 2014.

A collection of new ETF offerings

ProviderETF nameTickerInception Date (mm/dd/yyy)Management fee (%)*Assets under management (millions)
AGF ManagementQuantShares MultiAsset Income Allocation ETFQMY-T1/30/20170.55$2.63
AGF ManagementQuantShares MultiAsset Allocation ETFQMA-T1/30/20170.55$2.67
AGF ManagementQuantShares Global Equity Rotation ETFQGL-T1/30/20170.55$2.72
AGF ManagementQuantShares Enhanced Core Emerging Markets Equity ETFQEM-T1/30/20170.45$9.61
AGF ManagementQuantShares Enhanced Core International Equity ETFQIE-T1/30/20170.45$29.25
AGF ManagementQuantShares Enhanced Core US Equity ETFQUS-T1/30/20170.45$37.10
AGF ManagementQuantShares Enhanced Core Canadian Equity ETFQCD-T1/30/20170.45$38.61
Desjardins Global Asset ManagementDesjardins Developed ex-USA ex-Canada Multifactor-Controlled Volatility ETFDFD-T4/3/20170.6$5.17
Desjardins Global Asset ManagementDesjardins 1-5 year Laddered Canadian Government Bond Index ETFDCG-T4/3/20170.2$5.01
Desjardins Global Asset ManagementDesjardins Canada Multifactor-Controlled Volatility ETFDFC-T4/3/20170.5$5.12
Desjardins Global Asset ManagementDesjardins USA Multifactor-Controlled Volatility ETFDFU-T4/3/20170.5$5.18
Desjardins Global Asset ManagementDesjardins Canadian Preferred Share ETFDCP-T4/3/20170.45$9.99
Desjardins Global Asset ManagementDesjardins Canadian Short Term Bond Index ETFDCS-T4/3/20170.15$10.01
Desjardins Global Asset ManagementDesjardins 1-5 year Laddered Canadian Corporate Bond Index ETFDCC-T4/3/20170.25$10.03
Desjardins Global Asset ManagementDesjardins Canadian Universe Bond Index ETFDCU-T4/3/20170.1$20.20
Dynamic fund with BlackRock CanadaDynamic iShares Active Preferred Shares ETFDXP-T1/25/20170.58$112.12
Dynamic fund with BlackRock CanadaDynamic iShares Active Crossover Bond ETFDXO-T1/25/20170.58$8.18
Dynamic fund with BlackRock CanadaDynamic iShares Active US Dividend ETFDXU-T1/25/20170.8$8.98
Dynamic fund with BlackRock CanadaDynamic iShares Active Global Dividend ETFDXG-T1/25/20170.85$4.56
Dynamic fund with BlackRock CanadaDynamic Ishares Active Canadian Dividend ETFDXC-T1/25/20170.75$5.15
Excel Funds ManagementExcel Global Balanced Asset Allocation ETFEXGB-T5/17/20170.6$2.16
Excel Funds ManagementExcel Global Growth Asset Allocation ETFEXGG-T5/17/20170.6$2.16
Franklin Templeton InvestmentsFranklin Liberty Risk Managed Canadian Equity ETFFLRM-T5/30/20170.3N.A.
Franklin Templeton InvestmentsFranklin Liberty Canadian Investment Grade Corporate ETFFLCI-T5/30/20170.4N.A.
Franklin Templeton InvestmentsFranklin LibertyQT U.S. Equity IndexFLUS-T6/5/20170.25N.A.
Franklin Templeton InvestmentsFranklin LibertyQT International Equity IndexFLDM-T6/5/20170.4N.A.
Harvest Portfolio GroupEnergy Leaders Plus Income ETFHPF.U-T10/24/20160.85$1.26
Harvest Portfolio GroupUS Buyback Leaders ETFHUL.U-T10/24/20160.75$2.31
Harvest Portfolio GroupBrand Leaders Plus Income ETFHBF.U-T10/24/20160.75$2.60
Harvest Portfolio GroupHealthcare Leaders Income ETFHHL.U-T2/9/20170.85$8.53
Harvest Portfolio GroupUS Buyback Leaders ETFHUL-T10/24/20160.75$18.35
Harvest Portfolio GroupEnergy Leaders Plus Income ETFHPF-T10/24/2016N.A.$23.28
Harvest Portfolio GroupBrand Leaders Plus Income ETFHBF-T10/24/20160.75$31.88
Harvest Portfolio GroupHealthcare Leaders Income ETFHHL-T10/24/2016N.A.$185.83
Mackenzie InvestmentsMackenzie Maximum Diversification Developed Europe Index ETFMEU-T9/8/20160.6$4.48
Mackenzie InvestmentsMackenzie Core Plus Canadian Fixed Income ETFMKB-T4/19/20160.55$9.23
Mackenzie InvestmentsMackenzie Maximum Diversification Emerging Markets Index ETFMEE-T1/23/20170.6$13.58
Mackenzie InvestmentsMackenzie Maximum Diversification All World Developed Index ETFMWD-T9/7/20160.6$17.43
Mackenzie InvestmentsMackenzie Maximum Diversification US Index ETFMUS-T6/21/20160.6$30.49
Mackenzie InvestmentsMackenzie Maximum Diversification Canada Index ETFMKC-T6/21/20160.6$31.05
Mackenzie InvestmentsMackenzie Unconstrained Bond ETFMUB-T4/19/20160.55$34.05
Mackenzie InvestmentsMackenzie Floating Rate Income ETFMFT-T4/19/20160.65$38.09
Mackenzie InvestmentsMackenzie Core Plus Global Fixed Income ETFMGB-T4/19/20160.6$38.53
Mackenzie InvestmentsMackenzie Maximum Diversification All World Developed EX North America Index ETFMXU-T9/8/20160.6$52.18
Mackenzie InvestmentsMackenzie Global High Yield Fixed Income ETFMHYB-T4/26/20170.65$180.00
Manulife InvestmentsManulife Multifactor US Mid Cap Index ETFMUMC-T4/17/20170.5$3.78
Manulife InvestmentsManulife Multifactor US Large Cap Index ETFMULC-T4/17/20170.4$3.79
Manulife InvestmentsManulife Multifactor US Mid Cap Index ETFMUMC.B-T4/17/20170.45$3.88
Manulife InvestmentsManulife Multifactor US Large Cap Index ETFMULC.B-T4/17/20170.35$3.89
Manulife InvestmentsManulife Multifactor Canadian Large Cap Index ETFMCLC-T4/17/20170.4$4.99
Manulife InvestmentsManulife Multifactor Developed International Index ETFMINT-T4/17/20170.5$7.65
Manulife InvestmentsManulife Multifactor Developed International Index ETFMINT.B-T4/17/20170.55$7.90
Redwood Asset ManagementRedwood US Preferred Share ETFRPU.B-T3/15/2017N.A.$3.18
Redwood Asset ManagementRedwood Canadian Preferred Share ETFRPS-T3/15/20170.75$3.76
Redwood Asset ManagementRedwood US Preferred Share ETFRPU-T3/15/20170.8$3.81
TD Asset ManagementTD International Equity CAD Hedged Index ETFTHE-T3/30/20160.18$3.43
TD Asset ManagementTD S&P 500 CAD Hedged Index ETFTHU-T3/30/2016N.A.$5.21
TD Asset ManagementTD International Equity Index ETFTPE-T3/30/20160.18$6.90
TD Asset ManagementTD S&P/TSX Capped Composite Index ETFTTP-T3/30/20160.07$8.71
TD Asset ManagementTD S&P 500 Index ETFTPU-T3/30/20160.1$10.78
TD Asset ManagementTD Canadian Aggregate Bond Index ETFTDB-T3/30/20160.1$50.73

Data as of May 30, 2017. AUM data as of May 10, 2017. / *A management fee is a portion of a fund's management expense ratio and is charged by an investment fund for managing an investor’s portfolio. Typically, funds don’t report audited MER during the first year of their existence.

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