TD plans to get aboard the ETF bandwagon

Clients “are looking for lower-cost solutions,” said Salom at the October meeting, according to a transcript provided by TD.

TD joins two other big banks — Royal Bank of Canada (RBC) and Bank of Montreal (BMO) — on the ETF product bandwagon. The industry has grown rapidly in recent years to $83 billion in assets under management (AUM), according to figures provided by the Canadian Exchange Traded Fund Association.

TD originally was well ahead of the other banks, launching a family of ETFs in 2001 and staking a leadership position, but it closed the funds down in 2006 because of lagging asset growth and weak trading volume. The timing of its exit was not opportune, as the industry began to pick up rapidly in Canada shortly after TD pulled out. TD is now a relative latecomer to the ETF scene.

“We’re in the era of the great ETF land grab,” says Chris Davis, director of manager research at Morningstar Canada in Toronto. “There’s been a proliferation of ETFs, and providers are trying to take advantage of demand. It happened earlier in the U.S. and is now happening in Canada.”

He says TD will face a challenge in differentiating itself from other providers. Although the bank has had success in providing low-cost index-based strategies through its E series mutual funds, basic index-based strategies are already well-covered by ETFs in Canada and management fees are competitively low on these products, Davis says. Some product providers have differentiated themselves by offering factor-based, “smart beta” strategies designed to offer returns that beat the market or concentrate on a particular feature such as income or low volatility.

RBC, or example, has developed a niche by offering sophisticated factor-based quantitative strategies through its family of ETFs, rather than introducing me-too products that track the performance of broad market averages, Davis says. BMO, the first bank to enter the fray, has grown its ETF offering to $23 billion in AUM. Much of this growth is due to ETFs that are packaged in BMO mutual funds and thus have been able to penetrate the fund dealer channel. This channel is not yet accessible to ordinary ETFs that trade as stocks do.

“TD is coming a little late to the party,” Davis says. “They tried ETFs before, and maybe they should have stuck with it.”

On the positive side, he adds, TD has a large base of AUM and can leverage economies of scale in being cost-competitive. Like the other banks, it is also in a position to leverage its large distribution arm through the bank-owned advisor network. As well, it benefits from the history and stability of its brand name, which holds weight with investors.

“When you control giant distribution channels, it’s a lot easier to crack the market than if you’re just an asset manager,” Davis says. “It’s a harder slog if investors have to find you. TD has a lot of channels that can help it push product to its audience.”