'It’s easier to win business from mutual fund investors'

Asset allocator says MER savings are turning people away but that industry still has to educate clients on benefits and strategies of ETFs

'It’s easier to win business from mutual fund investors'

Fee discrepancies mean it’s becoming easier and easier to win business from mutual fund investors, according to a leading ETF asset manager.

ETFs outsold their older mutual fund cousins in Canada for the first time in 2018, although the latter still dwarfs its rival in the US.

Jeff Weniger, director, asset allocation, at WisdomTree Canada, is unashamedly in the ETF camp – he happily proclaimed he has never bought a mutual fund in his life - and told WP that open-minded investors are increasingly willing to cross over. However, he admitted that the industry has more to do to educate people about why this is a good move.

He lists ETFs' intraday liquidity, tax benefits and ability to avoid most of the capital gains “that drive advisors bonkers” as the main positives but acknowleged that many clients want the perceived safety and surety of an active manager.

He said: “Perhaps they are not as well versed in the knowledge that a factor-based concept is doing a lot of the same type of analysis that the active manager was doing in the first place at a cheaper basis point.

“I am screening out companies that have low dividends or low-quality factors or whatever it may be. There is also this full transparency – what do you want out of your active or quasi-active manager?”

Weniger believes the industry has been trying to protect the sanctity of the 1% advisor fee, meaning the first cuts arrived at product level. He said WisdomTree has gained considerable crossover business from the mutual fund investor because of this but that there are instances where being cheaper isn’t always the key to gaining new business.

“We do that by really educating the client in the flaws of market cap weighting,” he said. “You get the most bang for your buck on the fee side with something that is tracking the MSCI Canada Index or the S&P/TSX comp.

“I’ve been saying for some time that if you own the TSX comp, now you have about 1.5% cannabis on your weighting. What we’ll point out is that seems speculative.”

He added: “We don’t have a dog in the fight … we’ll add cannabis when the companies start to actually get by our factor screenings, which I suppose the active manager would do as well. And that’s to say, $10-20 million for a company that hasn’t earned a dime? I don’t think that will resonate too well.

“We don’t hold a position on medical or recreational – it’s none of our business. We hold a position on no return in equity. No return means no entry; you’re not in.

“For example, in the US, Uber is now a live security and Lyft is now a live security, but we won’t hold them because we are dividend weighting. So we’re not going to opine on whether Uber will take over the world but when it becomes a profitable company then sure, it will be added.”

Making a decision based on MER means many investors seek safety in numbers with a broad-based index tracker. But Weniger believes that the marginal fee gap between dividend-weighting WisdomTree products and pure “cap-weighters” is worth it because it’s better not to be in a totally reflexive fund."

The debate over strategies will rage on but Weniger, 38, said conversations with advisors are night and day with what he encountered only five years ago. People used to call them “EFTs” and be reluctant to learn more about the structure, he said, but the doors have been pushed wide open thanks to the big players, including many traditional mutual fund companies. They introduced propriety products and now have approved lists that time-strapped advisors can easily dip into.

He said the challenge for the ETF industry moving forward is to see the in-house asset allocation for the smaller ETF accounts dominate a company’s overall book of business and phase out mutual funds.

He said: “[ETFs] can be the entire book. And then, as an advisor, you become an ETF strategist. If you are in Toronto or Vancouver you are not going to be the only one but if you are in one of the smaller cities, you might be one of the few that is solely signed, sealed and delivered in saying, 'I believe in ETFs as a structure'. There is no compelling reason not to be that person.”

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