As the Canadian ETF industry continues to shatter records it’s attracting more players, potentially over saturating the market.
“While I think there is a lot of product out there, and we’re likely near a max point, it’s probably not saturated yet,” says Brent Vandermeer, Portfolio Manager and Executive Director, Private Client Group of Vandermeer Wealth Management.
“One has always had to do comparisons between investments (funds or stocks… ETF’s now too) and this is especially required for the main indices and the ETF’s that represent them – it takes a lot more work to find the differentiators and then to study why they are different and where the advisor lies in his/her beliefs about what structure is best. This can certainly be nebulous at times and difficult to determine… good luck to the DIY investor who has to try to figure this out. My guess is they don’t and they’ll use the household name product.”
BMO became the first of the big banks to enter into the industry in January. More recently, Toronto-Dominion Bank and Mackenzie Financial both announced they will launch proprietary ETF offerings at the start of this year. Other major mutual funds are also on the record indicating they’re looking to get involved in ETFs. There have also been a raft of industry acquisitions, including CI Financial Corp. acquisition of First Asset Capital Corp.
With so many products on the market and many more poised to join advisors have their work cut out choosing the correct ETF.
“Cost is key,” says Vandermeer. “Tracking error is huge – trying to get a proper NAV tracking tool for smart-beta or other non-published indices is tough. Liquidity of the underlying investments is paramount and often overlooked as this dictates the liquidity of the ETF itself and smaller spread. Wide spreads create challenges with cost drag that many investors don’t understand and liquidity challenges.”
At the end of the day the most important thing for advisors to keep in mind is liquidity of the underlying investment is key.
“If it’s not liquid, the market makers won’t post decent spreads and tracking error will increase and trading will be hard,” said Vandermeer. “Truly understanding what is being tracked is part of this and is of upmost importance. It can be hard now with new product development to track the underlying NAV (if it’s a composite or smart-beta or custom portfolio design) and that’s a challenge to understanding performance metrics, risk metrics, etc.”
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