Bringing ETFs to the masses

The entrance of BMO as an exchange traded fund provider should in no way be underestimated. With thousands of advisors at its disposal, and one of the most important ETF pioneers at its helm, the bank has set its sights on bringing ETFs into the mainstream.

It’s probably safe to stop referring to ETFs as an alternative investment. Interest in the products has exploded over the last two years to the point that during the depths of the downturn, ETF firms were still seeing huge net inflows of assets.

Canada’s largest ETF provider, iShares had net-new long-term money amounting to $4.4 billion last year. Horizons BetaPro saw assets in its line of ETFs grow by more than 200%.

Research firm, Investor Economics, highlights that total assets in Canadian-listed ETFs grew 8.02% in 2008 to over $19.3 billion. As of June of 2009, there is $24.2 billion in Canadian-listed ETF assets, of which roughly half are held by institutional investors.

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BMO, which formally launched a line-up of four ETFs in June, not only becomes the only major Canadian bank in the space, it has also acquired Rajiv Silgardo, the former CEO of Barclays Global Investors Canada as well as a number of his portfolio managers from that team. BGI owned iShares up until recently, and Silgardo was responsible for much of its success in Canada.

The addition of such a recognized pioneer as Silgardo to its ETF business sends a message that BMO is serious about its product development. In an interview with Advisor.ca, Silgardo says he believes the combination of his team’s experience with the branding power and distribution capabilities of BMO could be the right combo to entrench ETFs in Canada as a staple investment product, alongside bonds, GICs, stocks and mutual funds.

“When I came to BMO, I brought a team of portfolio managers with me who have been manufacturing ETFs for the Canadian marketplace for a very long time. This team has been together. We have taken the team expertise and hope to marry that to BMO’s distribution capabilities to ensure Canadian investors have access to very strong investment options,” he says.

Silgardo argues that the ETF industry is still in its infancy. This is apparent not only by the difference in ETF assets under management in Canada versus mutual funds, which represent more than $500 billion in assets, but also in the limited number of product offerings here, he says.

“I don’t think it’s a crowded marketplace. There are maybe 100 ETFs compared to a vast array of other types of investment products, even when you look at other structured products that investors have access too. Certainly ETFs have grown in number but they are by no means as large as the other investment products in the marketplace. The ETF marketplace still has room to grow,” he adds.

Silgardo’s former firm utilized many S&P indexes for its ETFs. BMO will differentiate its equity tracking ETFs using Dow Jones indexes. The decision to use Dow Jones as the index provider predated his arrival, Silgardo points out. He says it also allows for greater cost savings for investors without diminishing the sector-correlated performance of the ETFs.

“The Dow Jones Canadian index has 60 names — it compares to the S&P/TSX 60. The Dow index explicitly uses a liquidity screen along with the market capitalization screen. The companies in the index tend to be a little more liquid than the companies in the TSX 60. That’s a little better from an ETF perspective. You want broad exposure to the marketplace, but you also want exposure that’s more liquid, that way the ETF can be arbitraged more efficiently,” he says.

Silgardo notes that with the large cap U.S. index there are fewer names allowing for less turnover, which will reduce cost.

“[These indexes] still retain very high correlations. When I was looking at the performance number over the last five years, correlations of the Dow Jones indexes were running at about .995 to the S&P indexes.”

It may ultimately be the distribution heft that differentiates BMO’s presence in the industry. The branch advisor network and consumer brand awareness the banks have remains the envy of non-bank mutual fund manufacturers.

This could a have wider impact on the investment industry as more Canadians become aware of ETFs and the benefits they offer — in particular a lower cost base than an actively managed mutual fund.

“I think BMO will bring the product more into the mainstream with its bank branch networks, its investment branch networks, with the BMO life insurance subsidiary and the 4000 private brokers it has, in addition to BMO’s private bank for high net worth clients,” Silgardo says. “All of these are distribution networks that will be deployed to bring ETFs much deeper into the Canadian investment community.”