With ETFs growing rapidly, Kevin Gopaul, recently appointed chairman of the Canadian ETF Association (CETFA), says learning how to select and trade ETFs that fit with clients' financial goals and risk tolerance is becoming increasingly important for financial advisors and their clients. In Gopaul's view, education is essential to ensure the best experience for all parties involved, from providers to investors.
"If you're a money manager, you're a risk manager," says Gopaul, age 42, whose primary job is with BMO Global Asset Management Inc. (BMOGAM) in Toronto. His titles there include senior vice president, quantitative strategies and global ETFs; and chief investment officer (CIO) for Canada. "ETFs can be an efficient tool, but must fit with client objectives and time horizons. Many in the industry don't realize how much education is needed, and [CETFA] is focused on that."
Client service and education requires heavy investment among ETF providers, Gopaul says. This has been a priority at BMOGAM and is something Gopaul will be advocating in his role at CETFA. With the ETF industry still relatively young, he says, top-notch talent is not easy to find. As the industry matures and faces inevitable twists and turns in highly competitive financial markets, having the right kind of expertise — including legal, product development, portfolio management and client service — will be a key competitive differentiator for ETF manufacturers.
"We've been fortunate to attract top people. But if you don't have the right talent, growing the business can be difficult, no matter how good the product is," he says. "These are nuanced products."
In addition to knowing your firm's products inside out, you must be able to answer questions about how the ETFs available to your clients compare with those of competitors, which requires a detailed understanding of portfolio construction, Gopaul says. About 25% of the inquiries BMOGAM receives are about other providers' ETFs, he adds.
Even if you know the basics of how to trade and use ETFs, more advanced education is useful, Gopaul says. BMOGAM offers "master classes" in how to use ETFs for sophisticated portfolio-management strategies, such as using ETFs in combination with derivative vehicles, as well as to aid in understanding the nuances surrounding high-frequency trading.
According to CETFA figures, there are 514 ETFs, issued by 24 Canadian product manufacturers, which include big banks, insurance and investment fund managers, and small independents. As of July 31, assets under management (AUM) was $130.5 billion, a 23% increase year-over-year. Within the past year, the number of ETF providers has jumped by seven to a total of 24 firms, reflecting the hot pace in the ETF market over the past few years.
"The choice is good, but investors need to understand what they're buying and the kinds of exposures they're getting," Gopaul says. "If there's a risk that keeps me up at night, it's the rapid growth of product providers that are not experienced in the ETF business. If something goes wrong, the entire industry will be painted with the same brush."
Although the growth of the ETF industry has been strong, ETF AUM still is dwarfed by mutual funds' AUM of $1.4 trillion, as measured by the Investment Funds Institute of Canada.
The trading of ETFs is restricted to advisors at firms licensed by the Investment Industry Regulatory Organization of Canada (IIROC); firms that are members of the Mutual Fund Dealers Association (MFDA) are unable to access securities exchanges on which ETFs trade. Although a couple of MFDA firms offer ETFs through relationships with sister firms that are IIROC-licensed, a broad investment industry solution to opening up ETF trading has been elusive.
"As distribution continues to evolve, a solution will surface that will allow MFDA firms to offer ETFs," Gopaul says. "Proposed solutions may look simple on paper, but, in practice, they would take a lot of levels of co-ordination to make them work, based on the infrastructure required and the licensing [an investment dealer] has. Discussions are continuing and [CETFA] still doesn't know what the end solution will be, but we are supportive of innovation."
Gopaul, who has almost 20 years of experience using ETFs, is a true pioneer in the industry. ETFs first came to his attention in 1998, when he took his first job in the financial services sector, joining State Street Corp. in Toronto as a mutual fund valuator after studying economics, finance and computer science the University of Waterloo in Ontario.
A year later, working as an aspiring young equities portfolio manager for Clarica Life Insurance Co. in Waterloo, Ont., Gopaul sought an efficient way to achieve broad equities market exposure and found a solution in ETF-like Toronto index participation units (a.k.a. TIPs), which accessed the top 35 stocks on the Toronto Stock Exchange (TSX) and were, in effect, the original ETF. He also used another early ETF: high-income, pass-through securities (a.k.a. HIPs), which accessed the top 100 stocks on the TSX.
Along with a family of ETFs offered by Toronto-Dominion Bank, these early ETFs provided passive stock market exposure at low cost, thereby enhancing Gopaul's overall returns when combined with active portfolio-management strategies.
Gopaul's next job was back in Toronto as a trader in index arbitrage for Scotia Capital Inc., where he stayed for about a year. He then returned to his "calling of managing money," as he puts in, joining Barclays Global Investors Canada Ltd. in 2004, for which he oversaw the management of ETFs and institutional mandates. Barclays was capitalizing on the fact the large passive business being done by institutional funds could be broadened to the retail audience, Gopaul says.
Barclays' iShares division managed iShares S&P/TSX 60 Index ETF, created in 2000 from the merger of TIPs and HIPs, now is the largest ETF in Canada, with AUM of more than $11 billion. Gopaul was principal and portfolio manager at Markham, Ont-based BGI Benchmark Group International when he left to join BMOGAM in 2009 as a consultant to help launch Bank of Montreal's ETF business. He put on his "portfolio-management hat" when BMOGAM's ETFs were launched, becoming CIO and, later, taking on his other titles.
With the industry now offering an increasing array of strategies, from plain-vanilla passive to rules-based and fully active, Gopaul says, ETFs have the ability to target broad market exposures as well as more targeted strategies in both fixed-income and equities markets.
Gopaul views ETFs as being complementary to mutual funds rather than an either/or choice. He says ETFs now are used within diversified portfolios even by mutual fund portfolio managers, as well as by other institutional portfolio managers and retail clients. He views ETFs as an attractive alternative to the use of single securities for achieving allocations to specific market segments — such as a high-yield component within a fixed-income portfolio or Europe-based equity within a global stock portfolio.
"ETFs can be outcome-oriented, focusing on precise objectives such as low volatility, high yield, growth, value, momentum or quality — however the portfolio needs to be tilted."
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