With the launch of seven new mutual funds, BlackRock Asset Management Canada Ltd., kingpin of exchange-traded funds (ETFs) in Canada, has joined other Canadian ETF providers in cultivating a new camp of clients by establishing a foothold in the mutual fund dealer channel.

Although BlackRock is the largest player in the $60-billion Canadian ETF sector, it’s not the first to launch a product that packages ETFs inside a mutual fund wrapper to make them accessible to the mutual fund dealer channel. Within the past three years, Invesco Canada Ltd. of Toronto launched its Canadian family of PowerShares funds, and Bank of Montreal, also of Toronto, launched a series of BMO ETF mutual fund portfolios.

“It’s an exciting change for BlackRock,” says Mary Anne Wiley, Canadian managing director and head of iShares Canada, a division of Toronto-based BlackRock. “Outside of Canada, BlackRock is a large and successful mutual fund provider, and we are bringing this expertise to Canada with a new category of investment for those with a preference or a licence to sell only mutual funds who have not been able to access our ETF products.”

Each BlackRock fund portfolio will have a different strategic asset allocation using a fixed mix of iShares ETFs.

Member firms of the Mutual Fund Dealers Association of Canada are restricted by regulations from trading in exchange-listed securities. Meanwhile, member firms of the Investment Industry Regulatory Organization of Canada (IIROC) can trade ETFs freely. Following appropriate regulatory approvals, BlackRock expects the mutual funds to be available in the fourth quarter of 2013.

“It’s a great new channel for BlackRock and a way for MFDA advisors and their clients to gain greater access to ETFs,” says Pat Chiefalo, director of ETF Research and Strategy with Montreal-based National Bank Financial Ltd. in Toronto.

The new funds are designed to be a lower-cost alternative to traditional actively managed mutual funds, Wiley says: “The strategic portfolios are designed to be simple, efficient and transparent. They are solutions-based balanced funds, each offering different exposure along the risk spectrum.”

Revolutionary vehicles

Michael Cooke, head of distribution with PowerShares Canada describes the ETF-holding mutual funds as “a revolutionary hybrid vehicle.” The strategy can be employed across any asset class available in ETF form, including equities, fixed-income, currencies and commodities.

Since the PowerShares funds were introduced in Canada in 2009, the family has grown to include 17 funds with $2 billion in assets under management (AUM). Of these, 11 funds are structured as mutual funds investing in existing ETFs while six funds directly replicate an index methodology by owning the individual securities that make up specific indices. In addition, Toronto-based Invesco Canada Ltd. offers 14 Toronto Stock Exchange-listed PowerShares ETFs with AUM of about $1.5 billion.

The BlackRock organization is no stranger to the mutual fund business. Through various subsidiaries of U.S.-based BlackRock Inc., BlackRock has more than US$420 billion in AUM in mutual funds in 35 countries. The latest initiative will expand BlackRock’s roster of financial products in Canada, which already includes 93 Canadian-listed ETFs totalling $40.5 billion in AUM.

According to the preliminary prospectus filed in August, five of the new mutual funds will be balanced with a mix of equity and fixed-income ETFs, while one will hold only equity and another only fixed-income.

“The new mutual funds are another way for BlackRock to leverage its global expertise in Canada,” says Rudy Luukko, editor of investment and personal finance with Morningstar Canada in Toronto. “The new initiative capitalizes on the popularity of fund portfolios or funds of funds as well as the demand for balanced funds, which are now the most popular category in Canada.”

Any ETF can be wrapped into a mutual fund structure, which means there is potentially a wide choice of product available to clients of mutual fund dealer firms.

“The more options like these that become available, the more pressure on traditional mutual fund managers who actively manage their portfolios to prove their value,” says Dan Hallett, director of asset management at HighView Financial Group of Oakville, Ont.

With increasing client awareness of fees, a lower-cost product enables advisors to be more fee-competitive for clients without sabotaging their own income, he says.

Fee push-back

“There is increasing cost sensitivity and people are pushing back on fees,” Hallett adds. “As long as the trailer fee is no higher than average, a mutual fund holding ETFs allows the advisor to offer some of the cost advantages of a passively-managed, index-based product.”

Wiley sees the growth of mutual funds holding ETFs as a natural evolution for the investment industry. It’s already common for mutual fund and institutional managers to use ETFs within their funds for diversified exposure to a specific asset class, sector or geographic region in a cost-effective manner.

In Canada, BlackRock will capitalize on its ability to choose from its entire global suite of products in putting together its mutual fund portfolios.

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