Blogs & Comment

ETF industry shake-up

Jovian Capital Corp. sells its growing exchange-traded funds business and RBC gets into the ETF game.


For an industry that offers boring, no-fuss investments, the exchange-traded funds sector has sure seen its share of excitement this week.

On July 15, Toronto-based Jovian Capital Corporation—which owns a 58% stake in Horizons Exchange Traded Funds, Canada’s largest ETF provider—announced that it was selling its ETF business to South Korea’s Mirae Asset Global Investments Co.

The move surprised Dan Hallett, director of asset management for Oakville-based HighView Financial Group, who said Jovian’s ETF line is still fairly young, even though it has $3 billion in assets under management.

What surprised Hallett even more though is the $90 million purchase price, which is based on a $150 million enterprise value.  “That’s a pretty healthy valuation that is normally reserved for retail active mutual fund companies,” he says. The high purchase price suggests there’s a lot more growth to come in Canada’s ETF market.

While Hallett’s not familiar with Mirae Asset Global Investments, which is South Korea’s largest mutual fund company, he suspects their interest is twofold: it wants to enter the growing Canadian market and it could start offering ETF products in its native country.

“Having a South Korean company that’s already a big player there purchase an ETF company makes expansion easier,” says Hallett. “It’s trying to extract more growth.”

Hallett doesn’t suspect investors will notice a difference when ownership changes. If anything it means that ETF buyers are on the right track. “It’s even further validation that this industry is here to stay,” he says.

One move that may affect investors is RBC’s foray into the ETF market. On July 7 the bank accounted that it would start offering the index-based products. Its first securities will be eight target-date maturity corporate bond ETFs, which will be listed on the TSX.  

Hallett says he’s “puzzled” by RBC’s new line of products. The ETFs, he explains, are nearly identical to what BMO came out with earlier this year. Unless they undercut BMO’s fees, he’s not sure why brokers would buy RBC’s ETFs.

“You have to do two things in the ETF business,” he says. “You have to be a low cost leader or be innovate,” he says. Horizons has done both; BMO hasn’t innovated, but they did drop their expense ratios by a couple basis points below existing prices, which helped get money flowing their way.

It doesn’t look like RBC plans to innovate at this point, and it’s still unclear how they’ll compete on price. But they have to do something different if they want to make a real go at the ETF market.

“You know they’ll be competitive,” says Hallett. “If they’re going to convince the brokerage side of RBC to use their ETFs, they’ll have to at least match prices or undercut.”