If Rajiv Silgardo gets his way, financial advisors at bank-owned firms may need to shift their thinking about the role that exchange-traded funds play in investment portfolios.

The new head of Bank of Montreal’s ETF division is determined to gain a 10% share of the rapidly growing Canadian ETF market; that sector has swelled from assets of $20 billion as of Dec. 31, 2008, to $33.7 billion as of Dec. 31, 2009. So far, BMO is the only one of the Big Five banks to compete in the ETF space. But chances are, if it succeeds, other banks will follow.

There are hurdles, however. Non-bank firms that offer ETFs already include a strong group of established players; they have proven they don’t need a bank-like infrastructure to succeed in marketing their products. These players include Toronto-based BetaPro Management Inc., which has had its AlphaPro and BetaPro ETFs listed on the Toronto Stock Exchange since January 2006. And Silgardo’s former employer, Barclays Global Canada Ltd. ’s iShares ETFs — which were launched by Silgardo and his Barclay’s team — have been trading on the TSX since 1999. That venture, which merged with Blackrock Inc.in December 2009, has been highly successful: iShares now accounts for 80% of the ETF market in Canada.

By the time Silgardo made the move to BMO last summer, he had become the public face of Barclays’ Canadian operation, holding the positions of president and CEO from 2004 to 2009. Still, the 52-year-old executive seems relaxed about moving to an opposing team that is just getting itself established in the ETF space. He says there is still lots of room for growth in the ETF sector: “For all the noise and visibility around ETFs, it’s still really a market trying to break out.”

Certainly, the signs of a young but robust market abound. Although the entire Canadian ETF market still accounts for about only 5% of Canadian mutual fund assets, it has been growing at a rate of about 30% annually. In the first half of 2009 alone, ETFs made up 51% of the new products listed on the TSX.

Silgardo has not wasted any time getting BMO into the game. The bank has launched 22 new ETFs since he made the move from Barclays, and more BMO ETFs are likely to follow.

He also has had to deal with another substantial challenge: convincing financial advisors and others that ETFs have a place in clients’ portfolios alongside the traditional, actively managed funds that BMO offers. In the process, Silgardo will have to convince advisors that selling ETFs will not send a message to clients that managed funds, and those who sell them, are not needed.

In fact, Silgardo believes that managed funds and ETFs can work together to create a more profitable and resilient portfolio for retail investors. “We have to do a better job of educating the advisor community,” says Silgardo, who believes that ETFs offer important strategic diversification in a portfolio. A crucial part of that education plan, Silgardo says, is to convince clients that ETFs can actually solve some of their investing problems rather than simply provide a vehicle that passively tracks the performance of various markets.

Explains Silgardo: “We don’t just say, ‘Here’s an index, lets create an ETF on it.’ Instead, our thinking is ‘What is the problem we are trying to solve?’”

By way of example, he suggests that ETFs could be a solution for clients who wish to access highly specialized or hard-to-reach sectors, such as certain emerging markets and commodities. Among the ETFs now offered by the bank are BMO China Equity Hedged to CAD ETF and BMO Junior Gold Index ETF; such funds spread the risk of investing in volatile markets and help create diversification for clients.

Although managed mutual funds can claim that same type of efficient access to potentially volatile markets, Silgardo says, ETFs have lower fees and reduce risk further by giving clients access to broader asset classes. Of course, lower fees have always been a big draw when it comes to ETFs: BMO Dow Jones Canada Titans 60 Index ETF has a management expense ratio of 0.16%.

Other BMO mutual funds that hold shares in similar companies charge much more: BMO Guardian Canadian Large Cap Equity Fund, for instance, has an MER of 2.38%. In addition, Silgardo is pricing BMO’s line of ETFs at rates even lower than the competition. A similar, large-cap ETF, iShares CDN Large Cap 60 Index Fund, charges 0.17%.

@page_break@Silgardo’s expertise has been built over a long period. Born in Delhi, India, he decided to go to school in North America to obtain his master of business administration degree. While visiting his cousin, who was attending Durham, N.C.-based Duke University, Silgardo fell in love with the campus of the University of North Carolina at Chapel Hill. After completing his MBA there in 1982, Silgardo moved to Toronto to complete his PhD in economics at York University. He was hired in 1984, before he finished his PhD, by Toronto-based Canada Permanent Trust Company, which merged with Toronto-based Canada Trust in 1986.

Before Silgardo knew it, he was knee-deep in a research project examining the return of index-based funds, then a novel investment concept that his boss, Earl Bederman, now president of Investor Economics Inc. of Toronto, had asked him to look into.

“All of a sudden, I went from economist to portfolio manager,” says Silgardo. “It was my job to figure out the strategy for an index-based fund and figure out if this was the practical thing to do for our pension clients.”

After Canada Permanent merged with Canada Trust, Bederman moved to Toronto-based investment bank Central Capital Management Inc., and Silgardo went with him. It was there that the pair launched their first two ETFs, a Canadian and a U.S. index fund. “They were a little more sophisticated than your run-of-the-mill broad index fund,” recalls Silgardo. If a fund were to directly follow an index, he explains, it would simply take a small portion of every security listed in the market. However, due to transaction costs and bid-ask spreads, he adds, index funds will always have a drag on their performance: “The key was to adjust weights of securities to compensate for that.”

For instance, if the TSX at the time had 300 securities, Silgardo’s fund would select 170. Typical investing strategies, such as determining a company’s relative value to the index and its growth prospects, were used to decide which companies made it in.

Silgardo eventually moved on to Toronto-Dominion Bank in 1991 to help build its institutional business, specializing in fixed-income. In 1995, he became chief investment officer for Barclays. In hindsight, he says, that move was the one that led to developing his expertise in the market for ETFs designed for retail investors.

Silgardo and his team at Barclays bumped into a central problem fairly quickly: how could pension-based index funds be adapted to the consumer market, given that they could not be traded like stocks. “An inves-tor couldn’t go long or short, depending on their views,” says Silgardo. With that thinking in mind, in 1999, Silgardo and his team launched iUnits (which became i-Shares in 2005), an institutional-quality pool that traded in publicly listed units. “Unlike a bank,” he adds, “we didn’t have a branch network, so we thought, ‘Let’s stick them [on the TSX] and see what happens’.”

When Barclays moved its Canadian operations to San Francisco in March 2009, Silgardo and his team opted to stay in Toronto. It was then that BMO lured them over. “Toronto is home,” says Silgardo, who has raised his two daughters, 13 and 16, in the city. On weekends, Silgardo can be found in Forest Hill’s “village,” dining in or walking around the two-block hub of cafés and boutiques.

Since joining BMO in May 2009, Silgardo says, there has been just one significant shift in his focus: now, instead of worrying about distribution issues in a non-bank environment, he is considering how to leverage the existing branch network that BMO already has.

“Given everything that BMO brings to this business,” he says with a quiet smile, “I don’t see why we can’t capture 10% of the assets in the ETF marketplace.” IE