ETF issuers, CETFA Executive Director weigh in on research conducted for WP that finds how many investors care if their ETFs are Canadian-listed
A recent survey of almost eight thousand Canadians conducted by SAGO on behalf of the Canadian ETF Association (CETFA) and Wealth Professional asked respondents what information they want their advisors to provide to them about an ETF. Fees were the single highest factor, chosen by 59 per cent of respondents who currently own ETFs. That was followed by growth prospects at 53 per cent, risk rating at 51 per cent, management strategy at 38 per cent, and the country an ETF is listed in at 29 per cent. While country of listing was the least cited factor by respondents, Eli Yufest, Executive Director of CETFA, believes that the 29 per cent of respondents who value country of origin represent an important dynamic in the cross-border competition over ETFs.
Looking at the other factors cited by respondents, Yufest argues that there shouldn’t be much material difference in fees, growth prospects, risk rating, or management of equivalent strategies on both sides of the border. An S&P 500 ETF listed in Canada should be roughly equivalent to one listed in the United States, with the exception of currency hedging issues. He posits, therefore, that Canadian ETF issuers may see that patriotic cohort as a worthwhile dynamic in their drive to compete with US issuers.
Yufest cited separate research conducted on behalf of CETFA which asked Canadian investors what would motivate them to purchase a US ETF. The top three reasons cited, he said, were taxes, financial advisor recommendation, and the idea that there’s more choice. Given the fact that there are more ETFs per dollar of AUM in Canada than in the United States, he believes that third factor to be less realistic of a consideration beyond some very niche strategies. He argues for structural changes to make Canadian ETFs more competitive than their US counterparts.
“If I’m an investor looking at all these considerations and I’m an advisor recommending what my client should do, where am I making a recommendation? Well, you might want to consider the country of origin or where it’s listed. Then you factor in all the disparate regulators that we have and all the fees and all the taxes that the regulators impose on the industry. We’re in a very tough fight to keep our money here in Canada. There’s no doubt about it,” Yufest says.
How ETF issuers approach cross-border competition
“First and foremost, an investment has to stand on its own merits. An investor won't simply buy a fund because it is Canadian. But when two products can provide the same exposure and achieve a similar return profile, there is a real benefit to choosing the Canadian-listed option,” Argues Rohit Mehta, President & CEO of Global X Canada “Those assets don’t just benefit the ETF provider. They support jobs and activity across trading, exchanges, custody, technology, legal and regulatory services, and they generate tax revenue. Keeping more of that activity here helps strengthen both our capital markets and the broader Canadian economy.”
For all the advantages that Canadian-listed ETFs may have for Canadian investors, Mehta acknowledges that US-listed ETFs can sometimes outcompete when investors only look at the headline fee. Some of that comes down to the fact that US ETF fees don’t factor in currency costs. Yufest, however, adds that US ETFs don’t include withholding tax or HST in their fees, which can make a Canadian ETF with a similar underlying strategy more expensive to hold. Despite the breadth of the Canadian market per dollar of AUM, the absolute scale of the US market also cannot be ignored. That gives US providers additional advantages.
Avinash D’Souza, Vice President of Product Strategy at Harvest ETFs notes that US providers can often earn fees through activities like securities lending, offering them more ways to drive revenue beyond topline management fees. He believes that a clear understanding of the differences between the two markets could help level the field.
“Certainly things like GST that is not applied to the US counterparts and the allocation to redeemers mechanism available in US would be areas of consideration to help level the field,” D’Souza says. “Requisite regulatory communications of Canadian ETFs (which we think ought to be required) is not only not required, but also does have a uniform, easy to access and consistent methodology for calculating risk and performance metrics, including things for newer funds such as performance (including current yield information) can not be presented by Canadian issuers less than one year. These are structural disadvantages.”
Advisors’ role in cross-border ETF decisions
Despite the heady patriotism of the current moment, neither Yufest, D’Souza, nor Mehta argue that a maple leaf should be enough to convince an investor to buy a Canadian ETF. They are pushing for regulatory changes that would see tax bills on ETFs come down and force US-listed products to meet the same disclosure standards as Canadian products. Mehta notes with approval that the CSA and CIRO appear to be pushing for a more equal footing in disclosures.
“To be clear, this isn’t about closing the door to U.S.-listed ETFs. It’s about making sure products competing for Canadian investment dollars are doing so on a fair basis. That will help keep assets, jobs, economic activity and tax revenue in Canada,” Mehta says.
For advisors presenting these products to their clients, both Mehta and D’Souza insist on the importance of clear education. While country of listing matters for 29 per cent of Canadian ETF investors, the remaining 71 per cent may not know the key differences that can come with products listed south of the border.
“Where to put US listed ETFs compared to the similar Canadian domiciled fund are important items to consider,” D’Souza says. “With the plethora of US launches and some deregulation means that the types of products that have launched have wide ranges of scope and strategies, which is great for investors, but means that the products can be more complicated, or more risky, than face value would suggest.”
