If it is big business in Canada, the Big Six banks are usually not too far away. But aside from the Bank of Montreal, which first jumped into exchange-traded funds in 2009, the other major lenders have taken a slower approach to playing as providers in what has become a $153-billion industry.
Some in Canada expect that is about to change, increasing competition in a crowded market of ETF companies. Som Seif, founder and chief executive of Purpose Investments Inc., predicts banks will grow their market share over the next five to 10 years.
“The question is: What do they compete on?” Seif said, noting the variety of funds already on offer by more than two dozen providers. “But, ultimately, I think they’re all going to get serious at some point and somehow be engaged in the business.”
BlackRock Inc.’s iShares Canada has the most assets under management among ETF providers, according to the Canadian ETF Association’s statistics, with approximately $59.1 billion in 115 ETFs as of the end of April. Its AUM increased 0.4 per cent from the previous month.
In second place was BMO Asset Management, with around $48.3 billion in assets in 86 ETFs. Its assets were down 0.1 per cent from the prior month.
But Seif said BMO could overtake iShares during the next 12 months or so. As of April 30, the bank had 31.5 per cent of the market share among ETF providers, down just 0.1 per cent from December 2017. First-place BlackRock had 38.6 per cent of the market, down from 40.6 per cent from the end of last year.
BMO, Canada’s fourth-largest bank, in particular seems very interested in growing its ETF business.
“With BMO’s mutual fund and ETF products consistently recognized with top-tier risk-adjusted performance, we have all the elements in place for continued growth,” BMO chief executive Darryl White said at the end of February.
Seif also noted that Royal Bank of Canada is becoming more dominant in using their distribution network for ETFs.
RBC Global Asset Management was fifth in ETF assets under management, with nearly $5.2 billion spread across 40 ETFs as of April’s end. AUM grew 0.9 per cent over the previous month.
Among the other lenders, Bank of Nova Scotia owns 1832 Asset Management LP, whose Dynamic Funds division has partnered with BlackRock on actively managed ETFs. Toronto-Dominion Bank’s asset management arm was sitting on $75 million in ETF assets as of April 30, unchanged from the previous month, according to CETFA.
A stronger push into ETF manufacturing by the big banks would come as they continue to face fee-wary customers, a phenomenon that helped contribute to the rise of ETFs in the first place. But that push could affect those already entrenched in the business.
“It means that being able to be a successful ETF company, which takes scale, is just harder with more noise, more alignment,” said Seif, whose Purpose Investments has more than $4.9 billion in assets under management. “What it means is that you’ve got more competition, and in-house competition, for shelf space and products.”
Pat Chiefalo, head of iShares Canada at BlackRock Inc., said “there’s absolutely a focus from the banks on ETFs,” during a recent ETF panel in Toronto.
“Whenever you talk about financial service in Canada, you always have the presence of the banks,” he said. “There’s lots of talent, lots of brain power there and they’re very connected with their clients.”
If the other banks commit to ETFs like BMO has, deploying their vast resources and considerable distribution systems, they could alter the current landscape of providers.
Seif pointed to how the banks responded to mutual funds, saying the lenders about 25 years ago had little in the way of assets and acted more as distributors.
“Then one day they decided, ‘Let’s start playing in the mutual fund industry,’ took it seriously, and aligned their manufacturing and distribution,” he said. “And today, the banks are the most dominant mutual fund companies in Canada. When they got serious, they became massive in it.”
Further encroachment by the big banks on the ETF industry could be inevitable. The lenders already have large distribution networks and they play a big role in any investment vehicle in Canada, said David Kletz, analyst, vice-president and portfolio manager at Forstrong Global Asset Management Inc. That is also no different with ETFs, where lenders help with market making and other services.
“Certainly the banks have very large marketing and distribution capabilities, so if they devote a lot of that effort towards new ETFs, they could be quite successful in that regard,” Kletz said. “But I still think, for the established players in the Canadian industry, there’s certainly a place for them and I don’t think they’d be crowded out.”
It is also unlikely that non-bank ETF players would just let themselves be crowded out.
“We all believe we have a compelling value proposition that gives us a seat at the table,” said Michael Cooke, senior vice-president and head of exchange-traded funds at Mackenzie Investments, during the ETF panel. “And whether we’re a bank or a non-bank, that we have something compelling to offer Canadian ETF users.”
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