145 and Counting

By Tom Bradley

On the plane yesterday I was scanning the list of Canadian exchange-traded funds (ETFs). There were 145 funds on the list from four providers (BMO, Claymore, BlackRock and Horizons BetaPro). I know the numbers are higher now because I know of a few new ones that weren’t on the list and BlackRock just announced it was adding 6 sector funds to its iShares lineup.

A few things came to mind as I looked down the list:

The ETF providers have ceded the simplicity label back to mutual funds and wrap products. ETF-land is now a busy and complicated landscape.
With BMO’s 40 funds, investors can get exposure to almost anything, including short, mid or long-term government bonds, junior natural gas stocks and a bank portfolio with covered-calls written against it. The only exposure BMO investors have trouble finding is foreign currencies. All but a few of the foreign funds are hedged back to the Canadian dollar.
In general, it’s difficult to find foreign equity funds that aren’t hedged. In most cases, this has worked for clients, but with the Canadian dollar now at $1.04, this design feature will likely be less advantageous going forward.
Claymore continues to be the only player who pays a trailer to advisors. The extra fee ranges from 0.5% to 1.0% per year.
The Horizons BetaPro lineup is a marvel of modern financial engineering. There are leveraged Bull and Bear funds on everything you can imagine. I only detected one Bull/Bear pairing where returns looked out of whack. For one year, the Crude Oil Bear Fund was down 31.7%, while the Bull Fund was down 0.5%. This is an improvement from a few years ago when volatile markets caused a number of pairings to have negative returns in both funds.
As the fund offerings continue to proliferate, I expect we’ll also start to see more fund mergers. In pursuit of first mover advantage, all four providers have brought funds to market that only have appeal to a few investors at a specific point in time. When it isn’t that time, the funds are uneconomic.

As I said in a posting this time last year (ETF Providers Have Cluttered a Pristine Landscape), “when investors are looking for simple and transparent, ETFs are no longer the default. There are still many clean, easy-to-understand ETFs, but they're harder to find among the proliferation of new products.”