Is there an excess of ETFs on the TSX?

As the number of ETF listings on the exchange keeps increasing, an expert weighs in on the problems and opportunities it presents

Canadian investors are spoilt for choice when it comes to ETFs, and for good reason: the tradeable instruments, which are each derived from a basket of stocks, are an easy way to shore up one’s portfolio and get diversification. However, with hundreds of ETFs on offer, have providers gone too far?

“I think it’s going to keep coming,” said Karl Cheong, head of ETFs for First Trust Portfolios Canada in a recent interview with BNN. “There’s over 400 ETFs now on the TSX, there’s 1900 in the US… do investors need this, or is it too much choice?”

One way to answer the question is to compare ETFs with other fund classes. “Let me put this into perspective: there’s over 400 ETFs, but there’s about 3300 stand-alone mutual funds here in Canada… If you add up all the share classes, if you’re talking about the A series, deferred sales charge, low loads, there’s about 17,700 options to buy mutual funds here in Canada.” This, in Cheong’s view, indicates that if investors should be protected from excessive investment choice, then mutual funds should be trimmed down before ETFs.

But even disregarding the comparison with mutual funds, there’s still a concern that the number of ETFs has caused some overly niche products to crop up – which, to Cheong, are still justified given that they still represent baskets of stocks, and therefore still provide diversification.

Another possible concern with ETFs is the possibility that investors don’t know what they’re buying into. It can be confusing for an individual investor to decipher, based on an ETF’s name alone, what specific stocks or industry niche it invests in.

“That is the biggest risk of ETFs [as they proliferate]: reading the name of the ETF and assuming you know what you’re investing in… although more choices are better than less, we’re going to have to do some homework [to really know for sure],” said Cheong. It is for that reason that he suggests that investors work with financial advisors to sort through the options and figure out “what’s under the hood.”

That begs the question of whether there should be more research and reconnaissance on ETFs, the same way there is for stocks. According to Cheong, there’s already a system put in place in investment firms for that purpose, but individual investors who want to go the self-directed discount route will have a harder time.

“It’s a little bit more challenging. You have to look through and really understand what you’re doing before you dive straight into this industry. I think there’s a lot of tools, though, that are available to help you construct portfolios,” he said.

Related stories:
Corporate Canada’s risk-averseness may be hurting the economy
Are we seeing an ETF zombie apocalypse?