Issue April – May 2012
Howard J. Atkinson, Chief Executive Officer of Horizons ETF about differences and similarities of the Canadian market vs. the U.S. market, fee models, most demanded products and further innovations.
Howard, could you please characterize Horizons ETFs within one sentence?
Sure. Horizons ETFs offers one of the largest ETF families in Canada, with more than 80 ETFs listed on the Toronto Stock Exchange, giving investors exposure to a wide range of strategies from traditional index ETFs, actively managed ETFs to more sophisticated leveraged and inverse ETF strategies.
How many assets do you have under management?
We currently have about $3.5 billion in assets under management.
Who are your clients – private investors, advisors or more institutional players?
All these investor groups are well represented. We have very diversified distribution networks across our three core suites of ETFs, which are index-tracking ETFs, actively managed ETFs, and the leveraged, inverse, and volatility ETFs offered through our BetaPro family of ETFs. A lot of the assets in the index business tend to come from institutional investors, whereas our actively managed business is driven predominantly by financial advisors and our BetaPro assets are held primarily by direct investors in discount brokerage accounts.
We have very diversified distribution networks across our three core suites of ETFs.
Are there any differences in the behavior and needs of Canadian investors and ETF buyers based in the US – or the Canadian financial market in general?
Historically, the ETF industry in Canada looks to the U.S. for trends that occur there to give some sense of what could happen in the Canadian market, since investors in both markets tend to have similar investment objectives and the demographic make-up of both countries is pretty much the same.
Since the U.S. is approximately 10 times the size of Canada, the growth expectation of an ETF mandate in Canada that is similar to one listed in the United States, is usually projected to do about one tenth the amount of assets as is listed in the United States. This means an ETF that generates $50 million in assets in the U.S. would only be expected to generate about $5 million in assets in Canada. The Canadian ETF would most likely not be profitable. This means the U.S. has the economy of scale to support a much deeper breadth of market and economy of scale to support a much larger number of ETFs.
Are there exceptions?
Yes, there are exceptions to this. For example, we’ve raised more than $1.5 billion in our actively managed ETF suite. Whereas global actively managed ETF assets are only currently around $6 billion. Proportionally we had a lot more success with actively managed ETFs than U.S. providers. This has something to do with the prominent role of financial advisors in Canada as well as the regulatory environment, which makes it easier to launch actively managed ETF mandates. We’ve found Canadian financial advisors still have strong attachment to the concept of active management, so offering them more cost effective ways to get access to top-tier portfolio managers has been a successful strategy here.
You mentioned the actively managed ETFs. How about the process behind these active strategies? Who is involved in the portfolio management process?
All of our actively managed ETFs are sub-advised by either internal or external portfolio management teams. We’ve partnered with what we think are a number of the best asset management firms in Canada to serve the role as sub-advisor. Horizons ETFs is the ETF provider, in charge of the operations, sales and marketing of the ETFs. The portfolio managers are focused solely on what they do best, which is selecting the securities for the underlying portfolio. Conceptually, actively managed ETFs are exactly the same as mutual funds, the big difference is that they trade on the stock exchange and have much lowers costs in Canada. We don’t need to have a big robust back-office to field investor orders etc, so it is more cost effective for us to offer actively managed mandates than a mutual fund provider.
We generally don’t get complaints when a performance fee is paid out, because it means the ETF has delivered exceptional outperformance versus its benchmark.
On which fee-model are the actively managed ETFs based? (Fixed fee, performance fee, etc?)
All of our actively managed ETFs have a competitive fixed management fee. A few of our mandates have performance fees associated with them, but these have both a clearly defined benchmark and high-water mark that the sub-advisor must surpass. We generally don’t get complaints when a performance fee is paid out, because it means the ETF has delivered exceptional outperformance versus its benchmark.
How competitive are your fees compared to other actively managed ETFs?
We’re basically the only actively managed ETF provider in Canada, so we compare our fees to actively managed mutual funds. We do offer advisor-class versions of our ETFs which pay a service fee to advisors. Either way you slice it, whether its an E-class ETF without embedded compensation, or an A-Class ETF that pays a service fee, all of our actively managed ETFs are anywhere from 50 bps to 100 bps or more cheaper on an annual basis versus a mutual fund mandate.
The usage of these ETFs have remained pretty steady since about the end of 2009.
You offer also leveraged and inverse ETFs called Horizon BetaPro ETFs. How about the demand for these kinds of products?
The usage of these ETFs have remained pretty steady since about the end of 2009. These ETFs are in high demand when volatility is rising. Assets in these ETFs tend to spike dramatically. The inflows aren’t static, they ebb and flow based on market conditions, which makes sense, given that most investors use these ETFs as tactical investment tools to take advantage of different market conditions.
Which products are currently most demanded? Which ETF had recently the largest inflows/outflows?
Our largest inflows in the past year have been to our suite of actively managed covered call ETFs, which offer buy-write strategies on a portfolio of passively managed large-cap stock baskets. We’ve raised more than $600 million in these ETFs over the last 12 months.
We’re planning to also launch the first Hedge Fund Index product in Canada.
What are your (product) plans for 2012?
We’ve already executed several new product launches for Canada in 2012. We launched the first family of commodity covered call ETFs. These are ETFs that offer a covered call write strategy on physical commodities. We’ve also launched Canada’s first inverse volatility ETF, a high yield corporate bond ETF, a U.S. floating rate bond ETF and an innovative managed futures ETF, managed by Auspice Capital Advisors. We’re planning to also launch the first Hedge Fund Index product in Canada at the end of April. As previously mentioned we have some product launch initiatives poised for other markets in the Americas.
Are there any plans to cross-list your products on a trading venue in the U.S.?
We are currently in the process of looking at listing some ETFs in the United States. We can’t really divulge more details since it is early days in terms of product development. We don’t have a launch date set as of yet. We are looking to bring some ETFs to the U.S. market which are not currently offered by any of the existing ETF providers.
Which challenges you see for the North American ETF industry in general (if there are any)?
The massive success of the ETF industry has attracted the attention of the regulators. Regulation can be a dual-edged sword, its absolutely imperative to have a strong regulator environment to protect investors, but if regulation is conducted in a vacuum without industry consultation it can result in rules that could stifle innovation. Regulators understandably want to know more about ETFs and the risks they may or may not pose to investors as more money pours into the product class. ETF providers need to be working proactively with regulators, keeping them up-to-date on new industry developments and making sure they have a high level of comfort in understanding ETF investing will be absolutely essential to ensuring that regulators don’t create rules that impede the growth an industry that offers significant benefits to the end investor.
ETF providers need to be working proactively with regulators.
In Canada, you’ve created the world’s first ETF association…
That’s true – and its core mandates are education and working with regulators. The two work hand in hand, because personally I think the risks associated with ETF investing have been overblown and are largely the result of misinformation associated with ETFs and people not understanding how ETFs work. In Canada, ETFs are governed under the same security rules that govern mutual funds. That’s been very effective for us, because the vast majority of risk associated with ETF investing is already addressed by pre-existing rules that govern mutual funds. If we continue to educate investors on how ETFs work and their appropriate usage, I think we will also be able to avoid unnecessary scrutiny of regulators. Under that scenario, ETF providers can continue to innovate, regulators will be content and investors will be educated on an increasing number of low-cost investment vehicles.
Horizons ETF is part of the Mirae Group, which also operates an ETF brand in Hong Kong and Korea. Are there any strategic cross-relations or shared services between you and Tiger ETF?Our North American presence and success as a Canadian ETF provider attracted Mirae to acquire us this past November. Our previous investment in BetaShares, a relatively new, but rapidly growing Australian ETF provider, acts as a bridge between Mirae’s Asian ETF Business and ours in Canada. We are currently working on various corporate synergies and structures in order to build a successful global ETF company.
Howard J. Atkinson is the CEO of Horizons ETFs Inc. and author of the first book in the world devoted entirely to exchange traded funds, The New Investment Frontier: A Guide to Exchange Traded Funds for Canadians, (Insomniac Press, 2001). In total he is the author of four books including “Les Fonds Négociés en Bourse: Un outil de placement novateur pour l’investisseur avisé” (Transcontinental, 2003) and The New Investment Frontier III: A Guide to Exchange Traded Funds for Canadians, (Insomniac Press, 2005), considered the superlative authority on ETFs in Canada. He has been a contributing writer and frequent analyst referenced in many major Canadian newspapers, including The Globe & Mail, National Post, Toronto Star, Vancouver Sun, and Ottawa Citizen. Howard is a regular guest on BNN and CP24, and has appeared several times on CNBC Europe and Global TV. He is a past President of the Toronto CFA Society board of directors and is a member of the S&P/TSX Canada Index Advisory Panel.