Exchange traded products, including both funds and notes, are mushrooming in both quantity and variety at a faster pace than ever before, creating a juicy opportunity for advisors to help clients sort through the multitude of choices and assemble suitable portfolios.
In the first quarter of 2012, the pace of growth in both global and Canadian assets set records, Amelia Nedovich, head of business development, ETFs and structured products, Toronto Stock Exchange, told the 2012 Exchange Traded Forum in Toronto today.
“The first quarter saw the largest quarterly inflow ever for Canadian ETPs, and that parallels the global situation,” Nedovich says. “Assets are at a record high and there is still amazing potential for growth.”
At March 31, 2012 global ETP assets stood at US$1.7 trillion, having added US$67 billion in net new assets in the first quarter, a 57% leap compared to new assets in the first quarter of 2011. The level of new Canadian assets was up 30% compared to the 2011 first quarter, with total ETP assets now standing at $58 billion.
Canada saw 14 new ETPs listed in the first quarter, adding to the 69 that were newly listed in all of 2011. The number of ETPs on the TSX now stands at 257, compared to 50 just five years ago.
The strongest growth has been in the fixed income category, including ETPs investing in government, corporate, high yield and convertible bonds, Nedovich said. But ETPs cover an increasing range of asset classes and sectors. They can be used by investors to access developed and emerging markets, as well as a variety of sectors including agriculture, health care, banks and utilities. They can also be used to invest in strategies non-correlated to traditional stock and bond indices, such as managed futures or short selling.
“More choice is good for investors,” Chris McHaney, portfolio manager at Toronto-based BMO Asset Management told the conference. “With more than 250 products in Canada, investors can find a better fit in what they are looking for. With more choice, the more help investors need to sort through it, and advisors can play an important role in helping to simplify the decision-making.”
By revealing what’s in their portfolios on a daily basis, ETPs have greater transparency than mutual funds or closed-end funds that disclose their holdings on a monthly or quarterly basis, McHaney says. This means advisors can be more efficient in mixing and matching different products, knowing what they are buying at all times and whether the holdings of different products are complementary. ETPs can also allow for targeted exposure to narrow sectors.
“If an investor wants to invest only in banks, they can find a product that does just that,” he says. “That’s harder to do with mutual funds. ETFs allow for more precise portfolio building, and they can provide exposure to almost every asset class and geographic area. They also provide exposure that can otherwise be difficult for retail investors to access, including currencies and commodities.”
Even with stocks and bonds, the latest ETPs are also providing access to more sophisticated strategies than investing in broad market indices. A growing number of ETPs offer access to fundamental indexing strategies, where the weighting of individual companies in an index is based on their dividends, cash flow, or earnings momentum. These products are described by their proponents as more “intelligent” than ETPs linked to traditional indexes that base the weighting of companies on their market capitalization, potentially leading to the overweighting of overvalued stocks as their prices increase, and underweighting of undervalued stocks.
“The advent of ‘intelligent beta” is opening the ETF marketplace to new investors, advisors and institutions,” said Barry Gordon, President of Toronto-based XTF Capital Corp., a subsidiary of First Asset Capital Corp. “The goal of intelligent beta is to capture value not imbedded in traditional market indexing.”