A $15-billion open secret calls measures of exchange-traded fund values and industry assets into question
The introduction of single-ticket multi-fund products has been touted as a step forward for Canadian investors, especially those seeking a convenient way to get multi-asset exposure based on a specific risk tolerance level. But that has led to an unintended consequence.
“[T]he assets-under-management figures touted by the industry and some providers are ‘double counting’ as much as $15 billion in assets held in a growing class of ‘fund of fund’ products,” reported Victor Ferreira of the Financial Post.
Ferreira noted that most of the top Canadian providers have come out with ETFs of ETFs, which reinvest their assets into one or more of a provider’s base ETFs. That means when AUMs are calculated, assets placed in fund-of-fund offerings are counted not just for those products, but also for each individual fund within a given multi-fund product’s portfolio.
Figures from the National Bank of Canada indicate that Canada’s ETF space has a total AUM of $188 billion. But when accounting for double counting, it falls to $173 billion. Applying the same logic to ETF flows up to the end of September suggests that inflows for 2019 so far amount to $14.2 billion rather than $15.6 billion.
“Double counting is a marketing tactic — it’s a show of force,” Mark Noble, senior vice-president of ETF strategy at Horizons ETFs, said to the Post. “[B]y and large, rightly or wrongly, usually the deciding factor on if [investors] buy an ETF in an asset class is whether it’s the largest or not.”
Horizons has three asset-allocation offerings that are invested entirely in its own ETFs, as well as another four fund-of-fund solutions composed of ETFs from third parties. According to Noble, the firm doesn’t scrub out the double-counting effect when calculating its ETF AUMs.
Based on its own in-house analysis of BMO Global Asset Management’s ETF line-up, the Post determined that the firm also does not eliminate double counting from its AUM determinations. If holdings within BMO GAM’s 19 ETFs-of-ETFs were subtracted appropriately, its total AUM as of October 7 would dip from $59.91 billion to $52.93 billion.
“Vanguard, which ranks third in the ranking of ETF providers by AUM, has five asset allocation ETFs of ETFs, entirely made up of its own products,” the news outlet noted.
Investment firms have no real incentive to do away with double counting, Noble said. He also reported observing some new products amass hundreds of millions in AUM a few weeks after launch; after looking into their holdings, he said the lion’s share of flows came from other investment products offered by the same provider.
But according to Daniel Straus, National Bank of Canada vice-president of ETFs and financial product research, the practice of double counting is neither illegal nor harmful to investors. “[T] he size of the assets in a fund complex only really matter to the managers and shareholders of that company rather than the investors in the trusts who are getting the return experience of the underlying holdings,” he said.
There’s also a potential benefit, he added. Many ETFs-of-ETFs are created to provide a Canada- hedged alternative to an already existing product, so high trading activity for one will naturally result in a liquidity boost for the other.