Single-security ETFs present benefits, challenges

Single-security ETFs could complement the depositary receipts currently available to Canadian investors looking for U.S. exposure, but some ETF experts warn the funds would require an exemption to current concentration limits. The benefits and challenges of these funds were highlighted on Wednesday during various sessions of the ETFGI Global ETFs Insights Summit Canada.

“If single-stock ETFs are approved, we will see maybe a couple hundred of those in various flavours,” said Daniel Straus, director of ETF research with National Bank of Canada Financial Markets, during a session.

A single-stock ETF is “almost like a U.S. issuer coming to Canada, and then an investor can get indirect exposure to it,” said Raymond Chan, director of the investment funds and structured products branch of the Ontario Securities Commission, at another session.

To some, the term single-security ETF sounds “like a silly construct,” said Som Seif, CEO of Purpose Investments Inc., at the summit. Earlier this month, the firm announced it filed a preliminary prospectus for Canada’s first yield-focused single-stock ETFs.

“If there is a way for us to build a tool for the advisor and the investor to implement option writing on the most important names that they hold long in their portfolio, and now express their allocation to that name, then that’s a huge utility,” Seif said.

He added that options trading is expensive and difficult for the average retail investor, and most direct investing platforms make their money by “charging you an arm and a leg to trade in U.S.-dollar stocks.”

Single-security ETFs, if approved, would “complement” Canadian depositary receipts (CDRs), which are already available from CIBC, NEO Exchange chief revenue officer Erik Sloane said during another session. Both CDRs and single-security ETFs would “resolve friction in how Canadian investors buy global,” he said.

For example, it would have cost “more than a paycheque” for the average Canadian retail investor to buy one share of Amazon before the 20-for-one split in June, Sloane said.

But single-security ETFs would need an exemption to the concentration rules for funds, BMO global ETFs head Kevin Gopaul said at the same session. He added, “Hats off to the innovation, but I just worry that the downstream impacts have not been quantified or qualified.”

Some U.S. Securities and Exchange Commission officials are “not so excited” about single-security ETFs, which have been available in Europe since 2017, ETFGI founder and managing partner Deborah Fuhr said Wednesday as event moderator. She was alluding to an SEC warning issued in July, which noted various investor protection concerns.

The ETFGI Global ETFs Insights Summit Canada was held in person in Toronto on Wednesday and continued virtually on Thursday.