Why Canadian ETF providers might be in trouble

The Canadian ETF market may be booming, but certain providers could be facing a battle to survive

Why Canadian ETF providers might be in trouble
Jumping into the ETF space is a fashionable move amongst the active managers in the Canadian mutual funds space. It seems like a smart move to make. The Canadian ETF market is booming and continues to break records, and it would be remiss of the mutual fund players not to try their hand in exchanged-traded-funds. But it’s not that simple.

 ETFs currently account for $130.6 billion in assets (as of July 31), managed by 23 different providers, a figure that is up 23.3% from the same time last year. But what does this mean for the mutual fund market; is it still relevant? And, do mutual fund providers have any chance of toppling the ETF giants at the top of the pile?

“I think there is always a space for a mutual fund; it is a good structure for active strategies and not everything works for an ETF, like bond loans, for example,” says Alan Green, director and head of iShares Capital Markets for BlackRock Canada. “BlackRock has been public in its stance on not creating a bond loan ETF simply because the settlement characteristics, which can be T+30, do not match to a securities market that settles T+3 and is soon to be T+2 in September.”

The number of ETF providers has more than doubled in the past two years as more mutual fund firms enter the space. It’s a trend that has caught Green’s eye and one that he expects to continue, however he does urge caution. “I’m not sure all of them are well thought-out in their strategies,” Green says. “It is tricky for some of these mutual funds that don’t have any expertise in ETFs and have a whole salesforce selling mutual funds. There is definitely a trend but I question who will and who will not be successful.”

Increased investor choice is obviously a good thing, but is there a possibility that the ETF market may get a little oversaturated with too many ETFs for investors and advisors to wade through? 50% of all money into ETFs goes to a handful of core ETFs, Green notes. Although there is a lot of choice in the marketplace, most investors are able to build a solid portfolio with a handful of ETFs. Green finds it difficult to see how all 23 providers will survive as the vast majority of invested capital is directed into funds managed by the top three: BlackRock iShares, BMO and Vanguard.

“Also, looking at some of the revenue numbers, it’s hard to see how some of these companies are making significant money on the assets under revenue and assets under management, it’s really a scale game,” Green says. “Given the way the world is going, model driven and scalable, I would think there could be some consolidation amongst those issuers.”