Barclays global investors Canada Ltd. of Toronto will shortly have Canada’s burgeoning exchange-traded fund business to itself. Its only competitor in the ETF arena, TD Asset Management Inc., will be liquidating its four index-linked, exchange-listed funds by mid-March.

“And then there was one,” says Howard Atkinson, marketing manager for Barclays, which introduced another four ETFs in Canada just before Christmas, bringing its Canadian-domiciled product line to 16. In addition, Barclays offers 102 exchange-traded iShares domiciled in the U.S., which are available to Canadian investors in the same way U.S.-listed stocks are.

The four TD funds collectively hold about $377 million in assets, compared with $11 billion in the Barclays ETF iUnit family in Canada and $4 billion held by Canadians in U.S.-based iShares. While TD has been struggling to gain a foothold, assets in Barclays ETFs held by Canadian investors are up 26% from a year ago.

“The decision to terminate the funds is based on a lack of investor interest in the funds and low trading volumes since their creation,” TD said in a press release announcing the closures. A TD spokesperson adds that it was “a business decision” to close the funds.

TD’s four ETFs were all in the Canadian equity category: there was a composite index fund, a capped composite index fund, a growth-oriented index fund and a value index fund.

Barclays, by contrast, covers a variety of specialized industry sectors and asset classes with its Canadian-based family of 16 ETFs, including gold, financials, energy, bonds, REITs and international equities. Recently, investors have been paying more attention to hot sectors and geographical regions than to investment management styles such as growth and value. The four ETFs launched by Barclays in December include a dividend index fund, a materials sector index fund, an income trust sector fund and a real-return bond index fund.

They are targeted toward investor preferences for “rocks and trees,” bond funds with inflation protection, and yield-focused Canadian equity funds.

“TD’s products were good. But to be successful, what’s needed is a diversified family of products and a committed sales and marketing effort,” says Atkinson. “It’s not a case of ‘build it and they will come.’ You need to work hard to educate investors and advisors.”

The key attraction to ETFs is their lower costs, and the fact that many actively managed funds have difficulty beating market indices over the long term. The new Barclays iUnits materials sector index fund, for example, has a reasonable management expense ratio of 0.55% and tracks about 60 companies in businesses that include gold, base metals, diamonds and forestry. The iUnits income trust sector index fund also has a MER of 0.55%, while the dividend fund has a MER of 0.50%. The real-return bond index fund has a MER of 0.35%.

“Our research showed there was strong demand for these particular funds,” Atkinson says. “The dividend fund, for example, is an investor buzzword for value.”

While Barclays has been in the ETF market since 1999, TD first introduced its family of ETFs three years ago, following the success of its regular mutual funds and index mutual funds. Although TD’s mutual funds are sold directly to investors through the bank’s branches by mutual fund-licensed advisors, ETFs must be sold to clients by advisors that are licensed to sell securities. So, aside from the limited product choice among the TD ETFs, there could have been competitive issues in persuading a bank-owned brokerage firm such as BMO Nesbitt Burns Inc. or RBC Dominion Securities Inc. to sell an ETF manufactured by a competing bank.

Barclays does not have a bank or distribution arm in Canada and is not a direct competitor to the banks.

TD’s products were attractively priced, with its two largest funds having MERs of only 25 basis points, compared with 17 bps to 55 bps for Barclays ETFs. But unlike Barclays, TD didn’t advertise its ETFs nor have a team of wholesalers actively flogging the product through the advisor network.

“Canadian financial advisors have shortened the bench in terms of the number of suppliers they are willing to deal with,” Atkinson says. “If they can use four or five providers that meet their needs, why use 12?” IE