The intended merger of BlackRock Asset Management Canada Ltd.’s iShares exchange-traded fund lineup with that of Claymore Investments Inc., both of Toronto, will give BlackRock Canada a more sophisticated product lineup, allowing it to compete more effectively with rival mutual funds and rising competition on the ETF front.

U.S.-based BlackRock Inc. of New York, parent of BlackRock  Canada, has entered into an agreement with Claymore’s U.S. parent, Guggenheim Partners LLC, to acquire Claymore’s 34 Canadian ETFs, which have $7 billion in assets under management. Black-Rock is the largest financial services firm in the world, with global AUM of US$3.3 trillion. The Canadian subsidiary dominates the domestic ETF industry, with AUM of $29 billion in the i-Shares Canada family of 48 ETFs.

The purchase price has not been disclosed, nor has the fate of Som Seif, Claymore’s president and CEO, who has led that company’s aggressive march. The acquisition is subject to regulatory and shareholder approval, and is expected to close by the end of March.

“The product lineup of the two firms is highly complementary and there is little duplication,” says Mary Anne Wiley, managing director of BlackRock Canada. “By combining the two companies, we will create a robust toolbox for all investors. Having a fuller suite of products gives us more strength and power to compete with other managers in the investment universe, particularly mutual funds.”

Wiley adds that BlackRock Canada and Claymore are aligned in their conviction that ETFs are an attractive, low-cost and liquid mechanism for delivering a diversified pool of securities or market index returns to investors.

Both companies have been product innovators, but BlackRock Canada specializes in broad market indices weighted according to the market capitalization of the component securities. Claymore has taken a more active approach that it calls “intelligent investing,” developing ETFs based on fundamental indices or customized baskets of securities. (Fundamental indices weight securities according to factors such as assets, earnings and dividends rather than a company’s market value.)

Claymore also has been an innovator in other areas, being the first to offer an advisor series of funds that pay an annual 75-basis-point-trailer fee to commissions-based advisors and making ETFs more competitive with mutual funds. Claymore was the first in the industry to offer pre-authorized contribution, dividend reinvestment and systematic withdrawal plans for ETFs, features that traditionally have been available only to mutual fund investors. Wylie says it is too soon to say if any changes will be made in product features or whether there will be any ETF mergers.

Competition is heating up in the ETF business. Canadian ETF AUM has grown to $43.2 billion in about 225 funds, more than double the levels of three years ago. The number of players has doubled in the past year to eight, and includes names such as Bank of Montreal and Royal Bank of Canada, as well as U.S.-based behemoths Invesco PowerShares Capital Management LLC and Vanguard Investments Canada Inc.

Last year, the controlling stake in fast-growing ETF provider Horizons Exchange Traded Funds Inc. was sold by Jovian Capital Corp. of Toronto to South Korean giant Mirae Asset Global Investments Co., giving Horizons the deep financial pockets required to compete on a global scale.

“In the ETF business, you need scale to stay abreast of the competition as more new entrants appear on the scene,” says Dan Hallett, vice president and director, asset management, with HighView Financial Group of Oakville, Ont. “The business is getting tougher and requires a large asset base to take advantage of economies of scale.”

John Gabriel, an analyst with Morningstar Research Inc. in Chicago, says BlackRock and Claymore also complement each other in channel penetration: BlackRock has made strong inroads in the institutional arena, while it also has a good retail business; Claymore caters primarily to retail clients. IE