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BetaPro ETFs target short-term fluctuations for results

A year after enduring a storm of criticism for the way his investment products performed during the market crash, Howard Atkinson is busily expanding his controversial lineup.

The president of BetaPro Management Inc., a provider of exchange-traded funds, is adding products that give investors new ways to bet on the direction of copper and oil prices. He's also expanding his line of actively managed ETFs, run by star stock pickers, in an effort to take on the traditional giants of the mutual fund industry in their core business.

"It makes no sense to come at the market with a me-too, same-bells-and-whistles product," Mr. Atkinson said. "You might as well just rent a helicopter and throw your money out the window."

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He has attracted $2.7-billion of assets under management - as well as a lot of flak - by going places the rest of the Canadian investment industry doesn't.

Rather than espousing long-term, buy-and-hold strategies, as most fund companies do, BetaPro designs many of its products to appeal to investors looking for ways to bet on short-term fluctuations.

Those products are based upon daily returns. In contrast to most ETFs, which passively track a market, they allow investors to use the market's day-by-day results as starting points for more exotic strategies. BetaPro's "inverse" funds let investors bet against the stock market, or selected commodities. Its "leveraged" products magnify the market's daily movements, up or down. Its "spread" products play off the gap between oil and natural gas prices.

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Mr. Atkinson said BetaPro's sprawling family of 56 ETFs accounts for about 7 per cent of TSX trading volume - a surprisingly large footprint for a five-year-old Toronto-based company with only three dozen employees.

While BetaPro has done an impressive job of winning market share against much bigger ETF providers, such as iShares and Bank of Montreal, it has also taken heat for being too clever. Many of its products operate in ways that can confuse do-it-yourselfers.

Regulators and public interest groups flayed BetaPro's ETFs last year after investors complained that the returns they received from holding the products for extended periods didn't match the results they expected. The Investment Industry Regulatory Organization of Canada warned that leveraged products are probably not suitable for retail investors who intend to hold them for longer than a day.

The heart of the problem is one word: daily.

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BetaPro has always made it clear that its leveraged, inverse and spread products are based upon the market's daily returns. But the implications of that can easily be missed.

Depending upon the precise sequence of day-by-day results, long-term results can vary in unexpected ways, leaving investors who hold inverse or leveraged products with less profit than they expect. In general, the drag on the long-term performance of inverse and leveraged products is greatest when market volatility is highest - and the market has been particularly volatile over the past year.

Mr. Atkinson said educating investors about how the products work has been a priority since BetaPro launched Canada's first inverse and leveraged ETFs in early 2007. "It's been our biggest challenge, pretty much since conception, because volatility started to head up almost within a month of the time we launched," said Mr. Atkinson, who has been with the company since 2006. "We still deal with it today, but assets have grown, so clearly more and more people are learning how these things work."

After last year's controversy, BetaPro stepped up its educational efforts, offering workshops for advisers and seminars for individual investors, as well as posting papers and backgrounders on its website. "We want people to understand how these things work and use them intelligently," he said.

Despite the official warnings, inverse and leveraged products are on the rise. In the U.S., ProShares is expanding its array of inverse and leveraged ETFs. In Canada, Claymore Investments Inc. just introduced an ETF that replicates the inverse of the daily return on a 10-year government bond.

BetaPro's products have gained a large following among institutional investors, which now make up 55 per cent of customers. Financial advisers constitute 25 per cent of users and individual investors the remainder.

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BetaPro recently introduced an ETF that allows investors to make leveraged bets on copper prices and Mr. Atkinson aims to launch more inverse and leveraged products in the commodities area.

Mr. Atkinson plans to triple BetaPro's size over the next five years by growing internationally (the company recently bought a stake in an Australian ETF provider) and by continuing the rapid-fire pace of innovation.

"The next decade will be the decade of the ETF," he predicts, and he intends to enjoy it - one day at a time.

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About the Author

Ian McGugan is a reporter with The Globe and Mail's Report on Business and has been writing about investing, economics and business for more than 20 years. He joined the Globe and Mail in 2010. He has been executive editor of Canadian Business magazine and founding editor of MoneySense magazine. More

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