Growth. It’s the word most synonymous with Canada’s seemingly burgeoning ETF market. With record numbers of inflows and products being launched, everything on the surface looks rosy for ETF providers.
But for Sadiq Adatia, Chief Investment Officer at Sun Life Global Investments
, there’s an important news story that isn’t getting much attention: the amount of ETFs that are being shuttered.
“There are lots of ETF products being launched both in Canada and the US, but not a tonne of providers are making money, only a handful,” Adatia told WP at the Inside ETFs event this week. “Everyone thinks there is going to be increased momentum and that they can take a piece of the pie, and that’s why we are seeing so many products being launched. Some firms are hoping that one of their launches will pick up some traction. You just need one of them to do well and you’re good.”
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It’s generally the smaller ETF providers being forced to close funds down, Adatia explained. Firms will less AUM are struggling up against large index providers, and many are attempting to encourage investors to spend a few extra basis points by creating something unique.
“Even if these ETFs do achieve phenomenal performance, they still have to somehow get attention and then maintain it for a few years to gain momentum,” Adatia said. “If an ETF hasn’t done that after a few years, then it is dead in the water.”
It’s not uncommon for bigger players to close an ETF, too, although in many cases that occurs after a firm has launched an ETF as a calculated risk.
“They want to weed out the small plyers by launching the same things at half the price, knowing well that it may not even float,” Adatia said. “But, at the same time, those bigger providers then know that the guy next door won’t be able to do anything with that type of fund either.”
“People are still figuring out what both retail and institutional clients need besides the plain vanilla-type ETFs. They need margins too, and 2 or 3 basis points is not going to be considered enough. But if they find out they can sell an ETF at 10 or 12 basis points, that would be considered an attractive margin.”
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