What to expect from the ETF industry in 2015

Fraser Howell, president of First Trust Canada, points to new products in infrastructure and clean energy to come down the pipeline.

Ashley Redmond 23 January, 2015 | 6:00PM
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Ashley Redmond: I'm Ashley Redmond for Morningstar.ca and I'm here with Fraser Howell president of First Trust Canada. Fraser, thank you so much for joining me.

Fraser Howell: Good morning Ashley. Thanks for having me.

Redmond: We are going to start today off with a recap of the Canadian ETF industry in 2014. So, Fraser can you give me some comments on overall how you think the industry performed?

Howell: Certainly. 2014 was a great year for ETFs from a global perspective. Total assets reached more than US$2.7 trillion by year end representing more than 10,000 different funds from 240 different issuers on 62 different exchanges. I think it's very impressive, the scale of what's been achieved, in recent years. In Canada we ended the year with more than 350 different ETFs and $75 billion in assets, representing about a $10 billion increase from the prior year.

Redmond: Where did all this growth come from?

Howell: Well interestingly, despite the Canadian investor's long held home country bias with investing, the vast majority of that increase came from ETFs with U.S. and international equity exposures. Fund companies brought a number of new products to address that demand. For example, First Trust launched Canada's first European ETF earlier in February.

Redmond: Any changes to the playing field that you are expecting in 2015?

Howell: Well, the year ended with nine firms creating ETFs, the top two dominating the space with about 80% market share. But given the strong prospects for growth near term and long term we can certainly expect new entrants to the ETF space in Canada. And we look to: the big banks that haven’t yet dipped their toes into ETFs, large money managers, the mutual fund companies, the life cos and certainly the U.S. provides a number of issuers that I am sure are eyeing Canada.

Redmond: A popular topic here at Morningstar Canada is CRM2. So, can you touch on regulatory changes in 2015?

Howell: Well CRM2 has certainly been a very interesting topic for our industry. The objective of CRM2 is to provide greater disclosure and transparency on the fees that investors pay and the performance that they receive on their investments. It's being rolled out in three phases. It began last year and it will be fully implemented in 2016. I think from the ETF industry's perspective I think it's a very good thing. Anything that can increase an investors' awareness of the fees is a good thing particularly for an industry that prides itself on being low cost.

Redmond: It's great to hear that you are positive on CRM2. Next up the product changes [which is] always a popular topic in the ETF space. What are you expecting in 2015?

Howell: Well, the last thing that Canada needs is another plain vanilla exposure to the TSX 60 or the S&P 500. But I think where we'll see new products come down the pipe is in thematic ideas like infrastructure, clean energy, commodity place perhaps and certainly income products. Products that pay monthly distributions or peer-like distributions will always be in demand. A recent trend we are seeing in the U.S. is that of the ETF strategist; these are firms that create models that use ETFs as the building blocks. We are seeing tremendous growth in the U.S. on this front. For example, First Trust partnered with Dorsey Wright to launch a new ETF around our sectors based on a Dorsey Wright model, and it was one of the few funds launched last year that raised more than $1 billion. That’s a strong testament to the interest from investors and advisors on those types of strategies.

Redmond: It's safe to say it's going to be an exciting year for ETFs.

Howell: We all hope so.

Redmond: Thanks so much Fraser.

Howell: You're welcome.

Redmond: For more on ETFs, go to the ETF page of Morningstar.ca.

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Ashley Redmond

Ashley Redmond  Ashley Redmond is a Vancouver-based freelance writer.

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