Although a handful of weak exchange-traded funds in the U.S. were recently shut down, and more may follow, the Canadian market should remain healthy, according to some firms that create and market ETFs.
Lisle, Ill.-based Claymore Securities Inc. decided to liquidate 11 of its “lightly traded” U.S.-listed ETFs in February. The razor-thin management expense ratios that are one of the chief attractions of ETFs also mean that the companies behind them have to be ruthless in cutting out those that fail to catch on with investors and thus lose money, as did the 11 Claymore ETFs.
Som Sief, president and CEO of Claymore Investments Inc. , Claymore’s Toronto-based subsidiary, is quick to point out that each of its 19 Canadian ETFs are profitable and larger in terms of assets under management than the U.S. Claymore funds that were closed.
And rather than retrench, Claymore’s Canadian arm has launched three new funds in the past month: a laddered bond fund, a natural gas fund and, most recently, a money market fund that Sief describes as a first for North America.
“I don’t think Canada is going to see [ETF closures],” says Sief. “We’re pretty underdeveloped in Canada vs the U.S.”
But more closures in the U.S., where ETFs are far more plentiful, are a distinct possibility, he says.
Heather Palent, head of business development for Barclays Global Investors Canada Ltd. in Toronto, says Barclays has been waiting for some time for a period of rationalization to hit the rapidly proliferating U.S. ETF industry. “We had long predicted that in a market downturn, not all of them would make it,” she says. “This is the first. I think there will be more.”
Palent doesn’t expect her firm to trim its ETF roster, however. “We have absolutely no intention of closing any of them,” she says. “It is really core, sound, fundamental principles that have driven a lot of our product development. So, we are very confident across our global family that we are in really good stead here.”
Palent and others contend that size and scale are the key determinants of success in the ETF game. Barclays, by far the dominant player in Canada, certainly has market heft on its side. The firm runs 24 funds accounting for $16.8 billion in AUM, or 93.9% of the $17.9-billion ETF market. According to figures provided by Barclays, Claymore Investments is second, with $631 million in AUM, or 3.5% of the market; followed by BetaPro Management Inc. of Toronto, with $476 million in AUM, or 2.7%.
Dan Hallett, fund analyst and president of Windsor, Ont.-based Dan Hallett & Associates Inc. , was similarly not surprised by Claymore Securities’ decision to kill off its weakest funds in the U.S.
“There have been a lot of niche ETFs launched over the years,” he notes. “This is an area in which size matters a great deal because the fees are so low the assets have to be higher — compared with, say, an actively managed fund — to be self-sustaining and economically viable.”
Whether an individual ETF makes it or breaks it depends, therefore, on the company’s cost and fee structure and the complexity of the funds being offered.
Hallett says the ETF industry has gotten a little over the top. “I don’t view it as ETFs peaking or anything of that sort,” he says. “If anything, the ETF industry has adopted all the mutual fund industry’s bad habits by launching all these narrowly focused, niche, gimmicky products. That is not at all what indexing is about — nor what really spawned the popularity of ETFs.”
Claymore’s Sief contends, however, that ETFs can target a niche market and still win investors.
“Some of our niche products are our most successful products,” he argues. “When you are creating a business like this, you are bringing products that are more innovative and strategy-oriented that investors can’t get through a mutual fund. Sometimes those are your most successful products. At the same time, some things aren’t as successful. Some niche products don’t get the attention. And they may be great ideas, but people aren’t looking for them. You read the market wrong.”
Despite holding almost 94% of the market and with more ETF closures expected, Barclays continues to eye the ETF space to determine if there is investor appetite for new funds.
@page_break@“We are always looking at launching and innovating, and thinking about what clients need in the future,” Palent says. “Our product development is not confined in any way by the 24 [ETFs] that we have right now.”
Investors in a shuttered ETF will receive the net asset value of their investment at the time of the fund’s termination. IE
More closures of exchange-traded funds in the cards?
U.S.-based Claymore Securities shutters 11 lightly followed ETFs, but Canadian ETFs should be safe
- By: Paul Brent
- March 4, 2008 October 30, 2019
- 12:59