ETF price wars in Canada?

A roundup of industry participants highlights some ETF price pressure, but no call to arms.

“In Canada, unlike the U.S., we’re not seeing price wars. Here it’s more a case of price skirmishes — a raising of the flag to say, ‘Look at me, I’m in the ETF space,’” says Yves Rebetez, managing director and editor of ETFinsight.

Pat Chiefalo, director, derivatives and structured products, National Bank Financial, is seeing price pressure, resulting in select price reductions for certain ETFs.

“The entry of Vanguard, typically on the lower end of fees, introduces lower-cost products into Canada, which overall is a benefit to investors,” he says.

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But Chiefalo regards management fees as only one component of the equation.

“We do a lot of work on performance and on transparency. To us, those are key factors in assessing ETFs. Fees are part of the equation, but shouldn’t be the only determinant.”

Michael Cooke, head of distribution, PowerShares Canada, says, “ETFs and index products are not commodities; there’s more more to these products than just their sticker price,” he says. He suggests consideration be given to all aspects of an ETF, “including liquidity, tracking errors, and perhaps most importantly, the quality of the underlying investments.”

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As the ETF industry evolved, adds Cooke, there’s been an emphasis on innovation.

“By fixating on cost, it’s easy to overlook some of the innovation being created for investors,” he says. “An assumption that all ETFs and index products are created equal may have been true 15 or 20 years ago when indexing was in its infancy, but not so with the innovation we have today.”

Mary Anne Wiley, managing director and head of iShares Canada, says what’s stoking the discussion here is “media spillover into Canada from the U.S. about price wars. Investors need the relevant context; we have seven ETF providers in Canada and approximately 250 listed ETFs, contrasted to the US with over 50 providers and some 1,500 ETFs.

A few Canadian iShares ETFs have lowered management fees, since the U.S. products they hold have reduced their fees.

Read: iShares launches ETF suite, drops fees

Looked at as an investment category, says Wiley, “ETFs are a low-cost solution, representing only about 6% of the mutual fund pie in Canada today.”

Still, there are a myriad of reasons for lowered pricing. Asked about price battles, Kevin Gopaul tells Advisor.ca efficiencies of scale are what led BMO to lower pricing on three of its ETFs.

Read: BMO drops ETF fees

The growth of these funds, says Gopaul, senior vice president and chief investment officer, BMO Asset Management Inc., let BMO achieve efficiencies “in certain areas such as portfolio management processes, index provider fees, custodial relationships and trading efficiencies, which we then pass on to our end users.”

Gopaul says an ETF’s pricing should not be its key characteristic.

“We don’t encourage investors to look only at pricing; they should also consider factors such as transparency, tax efficiency, range of offerings and liquidity.”

Integrity of product

Is there a point where lowered fees could hurt the integrity of the product?

Chiefalo says yes. National Bank Financial looks for providers to offer good transparency and disclose as much information about the products as possible.

And that information “is not free; there’s a cost to doing so to the investor. What you don’t want to see happen is for fees come down to a level where it starts infringing upon all the great resources providers offer to investors,” he says.

“You also don’t want to cut fees to the level where it begins to hurt performance, because maybe lowering fees compromises product structure.”

He adds there’s “an appropriate fee level investors should pay for having access to ETFs. Zero is not the right level.”

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Rebetez agrees. “There is a floor to how low pricing can go unless your strategy is to give away the business to attract peripheral business,” he says.

In the U.S., “some large providers are offering pretty darn razor thin management fees such as 0.04%, hoping investors will stick with them when trading stocks or through other value-added services.”

But there’s danger in this type of strategy. In the U.S., he says, “some providers have exited the business already as their value proposition hinged on [offering the] lowest fees, which they didn’t have the scale to deliver.”