Playing The Field
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The world of dating has changed remarkably in recent times. Today, more people meet online rather than through "traditional" means like meeting at the office, gym bar or through friends and family than ever before. Technology and innovation have allowed for an absolute proliferation in dating apps and the dating game has changed.
Similarly in the investment product industry, while exchange-traded funds (ETFs) have been around for over three decades, it's only recently that their popularity has exploded. Over the last ten years, the ETF industry in Canada has grown at a compound annual growth rate of 16.7%1 . The ETF industry now has over 40 different providers and well over 1,300 different ETFs available to investors.
Nowadays investors not only need to know how to invest in ETFs, but also which provider they should choose. In this blog we will discuss a few considerations to help you decide which ETF providers to choose.
What is the ETF provider's size?
Barriers to entry in the ETF space are very low— almost anyone can gather investment capital and 'throw some spaghetti at the wall' to see what sticks. At the same time, barriers to success are also very high, given the additional costs and lower management fees, higher break-evens, and only those ETFs that can grow quickly will be successful and have staying power.
What is the ETF provider's pedigree?
What value do they bring to the industry? Do they have a legacy or expertise in passive, quantitative, or active investing? Once you know what you are looking for, it becomes easier to find. For instance, several ETF providers in Canada have long histories and expertise providing passive style investment products or have provided services to institutional clients for decades. Others have expertise in providing active management to the industry through other vehicles like mutual funds, or separately managed accounts. Rarely do you have firms that have experience in both institutional money management and retail wealth management.
Having a successful lineup of ETFs requires multidisciplinary expertise and significant resources, both in terms of capital and personnel. Take a look at the management team, their background, tenure and experience. A competent provider should have a diverse management team preferably with decades of experience navigating multiple market cycles in both good and bad times. Without these qualities, ETFs may fail to perform and gather assets and thus experience poor liquidity, and ultimately end up closing often to the detriment of investors. In some cases, investors could walk away with less that the net asset value of the fund.
How are their fees?
One of the unfortunate realities over the past several years in the ETF industry is one of fee creep. Often times ETFs are being launched at higher and higher management fees, as some providers 'test the waters' to see what prices the market will bear. This is not a universal trend of course, but what we are starting to see is that, in some cases, ETFs are launching at fees higher than comparable mutual funds. For passive investing, consider seeking out the lowest fees you can find, but for non-passive investments, make sure that the fees are reasonable, delivering value for money when one is seeking out active or quantitative solutions.
Fees can affect your returns considerably over the long term. An examination done by the Securities and Exchange Commission found that over a 20-year period, a 1.00% annual fee can reduce portfolio value by $30,000 compared to a portfolio with a 0.25% annual fee based on a $100,000 initial investment2.
How is the transparency?
One of the hallmarks of ETF investing has been transparency. When purchasing an index-tracking ETF, you can see the exact weights and breakdown of sectors and geographies updated daily. This is a marked departure from traditional mutual funds where transparency typically consists of top-ten holdings only.
What's interesting about the ETF space is that on the quantitative and fundamental active side, some ETF providers are still fully transparent. While there is little consistency here, it's important to note that some providers are non-transparent in their active solution set. If you prefer full transparency, note that not all ETF providers offer this. Transparency will allow you to build a properly diversified portfolio limiting the concentration risk in any one security or sector.
About TD ETFs
It's not just about the proliferation of choice—nowadays investors need a roadmap to be able to incorporate ETFs successfully into portfolios. As one of the largest institutional asset managers in Canada, TD Asset Management Inc. (TDAM) has been offering index investments to pension plans, endowments, and foundations for decades—but we've also been offering index investments to Canadians since before ETFs were invented, since 1985 in fact.
With a legacy of experience in passive investing, we also offer ETFs that are sector focused, quantitative active solutions from one of the largest quantitative teams in Canada, and fundamental active solutions from our award-winning portfolio managers. As one of the fastest growing providers over the past four years, we have grown our ETF assets from $1B in 2020 to $12B in 2023.
To view our entire ETF line-up, visit us at td.com/etfs and download our TD ETF Product Guide.
1ETFGI. (2023, October 12). ETFGI reports the ETFs industry in Canada gathered US$1.38 billion in net inflows in September.
2 SEC. (NA). How Fees and Expenses Affect Your Investment Portfolio.
The information contained herein has been provided by TD Asset Management Inc. and is for information purposes only. The information has been drawn from sources believed to be reliable. The information does not provide financial, legal, tax or investment advice. Particular investment, tax, or trading strategies should be evaluated relative to each individual's objectives and risk tolerance.
Commissions, management fees and expenses all may be associated with investments in exchange-traded funds (ETFs). Please read the prospectus and ETF Facts before investing. ETFs are not guaranteed, their values change frequently, and past performance may not be repeated. ETF units are bought and sold at market price on a stock exchange and brokerage commissions will reduce returns.
Certain statements in this document may contain forward-looking statements (“FLS”) that are predictive in nature and may include words such as “expects”, “anticipates”, “intends”, “believes”, “estimates” and similar forward-looking expressions or negative versions thereof. FLS are based on current expectations and projections about future general economic, political and relevant market factors, such as interest and foreign exchange rates, equity and capital markets, the general business environment, assuming no changes to tax or other laws or government regulation or catastrophic events. Expectations and projections about future events are inherently subject to risks and uncertainties, which may be unforeseeable. Such expectations and projections may be incorrect in the future. FLS are not guarantees of future performance. Actual events could differ materially from those expressed or implied in any FLS. A number of important factors including those factors set out above can contribute to these digressions. You should avoid placing any reliance on FLS.
TD ETFs are managed by TD Asset Management Inc., a wholly-owned subsidiary of The Toronto-Dominion Bank.
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