Small ETF firms gain share

The BMOGAM study found that small players in the Canadian ETF sector have increased their share of the sector’s AUM to 32.3% by September 2013 from 26.1% at the end of 2012.

Of the nine providers in Canada’s ETF market, BMOGAM counts eight as small providers. BMOGAM ETFs are the biggest of the small fry, with $11.7 billion in AUM. Toronto-based BlackRock Asset Management Canada Ltd.‘s iShares ETFs hold the lion’s share of the ETF market, with roughly $40 billion in AUM.

One of the reasons smaller providers have been able to increase their market share is product innovation, says Mark Raes, head of product, global structured investments, with BMOGAM.

Emerging markets

“It’s a natural thing,” says Raes. “When new entrants start to look at [the ETF sector], they say, ‘What value can we add? What do we think is missing in the marketplace?'”

In asking such questions, he says, new entrants hope to find niches that will attract new investors to the sector.

Raes points to BMOGAM products offering clients exposure to preferred shares and emerging-market bonds as reasons for BMOGAM’s growth.

Toronto-based PowerShares Canada, a subsidiary of Atlanta-based Invesco Ltd., also is a smaller player in the ETF market, with about $5 billion in AUM (including PowerShares Funds, Toronto Stock Exchange-listed ETFs and U.S.-listed funds). PowerShares’ growth has come, says Michael Cooke, head of distribution, through product innovation, particularly ETF-based mutual funds.

Although AUM in the ETF sector overall is growing, there are significant challenges to potential new entrants in the ETF market. The health of the ETF market may seem attractive to potential new product providers, says Cooke, but product saturation could stand in the way of new entrants.

“It’s a market in which we’re seeing – at least, in the U.S. and, to an extent, in Canada – more [ETF] closures than launches in the past two calendar years,” says Cooke. “And that’s not necessarily a bad thing; I think it’s the pause that refreshes.”

Also, adds Raes, barriers such as investor comfort with entrenched brands and products will make it difficult for potential new entrants.

Nonetheless, says Cooke, the Canadian ETF market is relatively immature compared to the U.S. market: “When you look at ratios such as the proportion of mutual fund AUM to ETF AUM in the Canadian market, [which is] in the range of about 15:1, vs 8:1 in the U.S., there’s still a lot of growth to come.”

As of Aug. 31, mutual fund AUM in Canada totalled about $926 billion, dwarfing the $60 billion in ETF AUM.

Shift toward equities

In Canada, any expansion is likely to come from the banks, says Cooke, particularly those with strong footholds in traditional asset management. However, he adds, any new bank provider probably is still a long way off, and will most likely appear through an acquisition rather than organically.

The BMOGAM report also notes a shift toward equities-based ETFs, with those products receiving almost 40% of year-to-date inflows – almost $1.7 billion as of Aug. 31.

Fixed-income ETFs have received the most attention from investors, attracting 55% of year-to-date inflows ($2.3 billion) as of Aug. 31. Conversely, commodities-based ETFs have seen outflows of about $100 million as of the same date.

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