From Pioneer to Latecomer: TD Re-Enters the ETF Market

TD Global Asset Management registered its ETF lineup in December 2015. It consists of 4 individual funds, 2 of them have CAD hedged version. The funds haven’t been listed on the Toronto Exchange yet. Their preliminary prospectus are available at This is a blockbust for the Canadian ETF market due to TD’s market status in Canada. A series of questions come to my mind: Why does TD do this? What’s special of TD’s products? How will the whole market be shaped in 2016? I tried to find some answers.


Why does TD re-enter the ETF market?

Undoubtedly, TD’s re-entry means the ETF market is something you must have for major participants. It is an overwhelming market trend that no one can be just a spectator.

According to the media news, TD was once the pioneer in the Canadian ETF market. It lauched 4 ETFs in 2001 but exited in 2006 due to low money inflow and trading volume. This is an excellent proof of the importance of timing, just as what was disclosed in a widely spreaded TED speech “The Single Biggest Reason Why Startups Scucceed (June 2015)“. Good business idea is not enough to promise success, timing matters. This time when TD enters again, although we cannot say it is perfect, but I won’t say it is too late.

TD has considerable client assets managed in form of mutual funds. With the approaching of CRM2 implemantation deadline and the increase of consumers’ awareness of MERs, TD have to find substitution for those mutual fund assets. If it have no in-house ETFs, inevitably customers will turn to other ETF providers. So TD has no choice. All the big banks have no choice but to join the battlefield. This is the cold hard truth for the banking industry.

What’s TD’s ETF products strategy?

By reviewing the 4 ETFs, we can see TD is using the strategy of outsourced broad base index and competitive pricing.

1, Currently all the indices are provided by S&P Dow Jones. One of the 4 indices, S&P EPAC EX-Korea LargeMidCap Index was launched just launched on December 7, 2015, looks like a customized index for TD. We can compare it with BMO. BMO has over 60 funds, so it uses many different index providers, such as FTSE, S&P, Solactive and etc.

2, All the 4 ETFs are broad based. We can say that as TD’s first step, it just manufactured some building blocks. If we look at RBC, the strategy is quite different. Its “Quant” series are using rule-based, multi-factor approach. RBC’s Quant series can be regared as smart beta funds though it didn’t use related name. RBC don’t have those basic building blocks. I think RBC’s strategy is more pragmatic as they don’t compete with iShares or Vanguard on those building blocks. From another point of view, I may say TD’s strategy is more aggressive.

3, TD ETFs’ pricing are competitive. We can compare TD’s Canadian Aggregate Bond Index ETF’s management fee with 3 major players in the marekt. TD charges 0.10%, iShares Canadian Universe Bond Index ETF (XBB) is 0.30%, BMO Aggregate Bond Index ETF is 0.20%, Vanguard Canadian Aggregate Bond Index ETF is 0.12%. Although these ETFs track different index and have different holdings, we still can get some color of TD ETFs’ pricing strategy.

How will the Canadian ETF market evolve in 2016?

The prosperity of the ETF market needs a ecosystem which includes many participants, such as index providers, fund issuers, exhanges, distributors, regulators and consumers. It takes a long time to cultivate the market and make all parts integrated smoothly. 15 years has passed since the first ETF was launched on Toronto Stock Exchange, 2016 will be a critial year for the ETF market as the majority of big banks entered the market. Here I have some personal prediction for 2016:

1, Big five banks will have some substantial move in the ETF market. BMO may consider sreamlining its lineup as ETF is a scale-do-matter game. RBC has already accelerated its product rolling out speed. TD will hit the ground running in the first quarter of 2016. Scotia and CIBC should have some news related to ETF in the year.

2, Purpose Investment is a company I will pay close attention to. Som Sief, the charismatic CEO who successfully created Claymore Canada, positioned his new company to “change the industry”. I have very postitive anticipation with this company.

3, Regulation should change to adapt to the development of ETFs. Currently most of the retail finance sales people are licensed as mutual fund representative, they cannot talk about ETF products with clients. It is expectable that the license rules will be modified to reflect the industry evolution.

4, Advisors should upgrade themselves to meet clients needs. ETF proliferation and product innovation are so fast that they challenge advisors’ capability of learning new things. Robo-advisors emerge to compete with human beings. Advisors should provide some “Advisor Alpha” which the concept was firstly presented by Vanguard.

Abstract in Chinese /中文摘要:



BMO SmartFolio Review

Last week, BMO launched its new service SmartFolio. It’s “a digital portfolio management service”, the bank’s news announcement says. I tried its online registration process, read its online documents, examined its model portfolios, talked to a service representative over the phone. Here are some brief comments:

1, BMO’s spirit of innovation in the wealth management field is impressive and respectable. For example, in the discount brokerage battlefiled, it launched “AdiviceDirect” service several years ago. It provides stock/fund recommendations and portfolio construction/rebalencing suggestions to self-direct trading account holders, charges fees by 0.5-1.0% of the portfolio assets. In 2014, I tried this services for 6 months. No matter the successfulness of AdiviceDirect, the attempt itself is absolutely meaningful and respectable.

another good example is the ETF products. By the end of 2015, BMO accounts for 27.1% AUM in the ETF market (vs. BlackRock’s 52.4%), yet 3 years ago it had only 16.4% (vs. BlackRock’s 73.8%). Comparing the two charts below, we can see the Canadian ETF markets are getting more crowded, but BMO still gains market share substantially.

Canadian ETF Market by the end of 2015

Canada ETF Issuer stats Dec 2015

Canaidian ETF Market by the end of 2012

Screen Shot 2016-01-26 at 10.55.23 AM

Direct source: Canadian ETF Association Website,

2, BMO SmartFolio can be regarded as a kind of compact/simplified discretionary portfolio management service. Many news reports linked SmartFolio to robo-advisors such as WealthFront, Betterman or WealthSimple. Actually, there are very different. Robo-advisor service are strictly rule based, while SmartFolio is “actively managed by a team of BMO professionals”. Collectively, the 12 expert team has over 165 years of experience (quoted from its website). We can regareded the SmartFolio as a fully discretionary account which use in-house ETFs as components (rather than pooled funds or individual securities). In the below I creat a simple chart to position SmartFolio in the spectrum of different services from totally DIY to fully discretionary:


3, Its fee policy is not competitive. But this service could be very good substitute to mutual fund portfolios. BMO SmartFolio is not cheap at all. It charges annual management fee of 0.7% for the first $100,000, on top of that, clients shall also pay the average 0.3% MER of the ETFs in their portfolio. In total it’s about 1%. This doesn’t make sense to high value clients, as most of them they need face-to-face interactions. This doesn’t make sense to fee-sensitive couch potato DIYers as they can build their portfolio with much lower cost and much more variety/flexibility. I don’t know BMO’s real stragety and expectation of SmartFolio, but considering the context of CRM II in Canada and consumers awareness of mutual fund fees, I think it is a very good strategy to convert current mutual fund customers into SmartFolio gradually, targeting the mass affluent market.

4, The portfolios are Canada focused. The SmartFolio has 5 model portfolios which covered the whole spectrum from very conservative to growth driven. I tried the online questionare and reviewed 3 of them and found they weighted relatively high in Canada. In the Capital Preservation portfolio (10% equity/90 bonds), Canada bonds account for 69.7%. In the balanced portfolio (50/50), 62.6% is invested in Canada equity and bonds. In the equity growth portfolio (90/10), 49.31% is Canadian equity.

5, SmartFolio still has a lot of potential to evolve. The SmartFolio is still in its preliminary stage so unavoidably it has some limitations. Here are some by my perception: (1) It consists of only 2 asset classes, equity and bonds. Currently there is now way if client wants to add REITs, commodity, or other alternative components into their portfolio. (2) It only uses BMO’s in house ETFs. (3) It doesn’t support U.S. funds.

Among the big 5 banks in Canada, only BMO and RBC has their own ETFs. BMO is the only one which provide this kind of ETF-only portfolio services up to now. But I belive all the other banks are paying close attention to the market trend closely. RBC is catching up in the ETF issues very quickly, yesterday it launched 4 more new ETFs which make its ETF lineup has 24 funds. The rest 3 banks may consider purchase a established robo-advisor in the market by my guess.


Goldman Sachs’ Entry is a milestone for the ETF markets

2015 is a year of innovation for the ETF industry. Smart Beta is no doubt the hottest theme.  Hundreds of smart beta (or other fancy names) rolled out throughout the year. But one of the most remarkable news attracted my attention is Goldman Sachs launched its first ETF in September 2015 which also uses smart beta concept.

By my personal percetpion,  the ETF market has an overwhelming “winner takes all” characteristic. The big three fund managers, Black Rock, State Street and Vanguard, take away 80% of the asset under management. By my rough calculation, the largest 20 ETFs count for only 1% of the numbers of funds, but count for more than 30% AUM and trading volume. Scale really matters in ETF markets. This make new funds very difficult to survive. Neither for the big name as Goldman Sachs.

Goldman Sachs launched its first ETF in September 2015, the Goldman Sachs ActiveBeta(R) U.S. Large Cap Equity ETF. According to the US Securities and Exchange Commission webiste, Goldman Sachs’ ETF lineup has 12 funds, among which 6 funds are ActiveBeta ETFs, 5 are Hedge Fund Tracker ETFs, 1 is ESG ETF. Up to now only 3 ActiveBeta funds are incepted.

Screen Shot 2016-01-21 at 11.52.17 AM

Source: WWW.SEC.GOV webiste

In order to know more about Goldman Sachs’ ETFs, I read theire documentations and have some personal findings:

1, Goldman Sachs funds’ positioning strategy is taking the two ends of the spectrum. At one end, it has 6 broad market ActiveBeta ETFs, which are must-have components in any portfolios. At the other end, it tries to target a niche market with Hedge Fund Tracker ETFs, which the market has high potential demand but limited supply. I believe Goldman Sachs don’t want to compete in the very crowdy middle market (funds of single investment theme).

2, Its funds use multi-layer indexes. For example, the Goldman Sachs US Large Cap Euqity ETF (GSLC), uses Solactive US Large Cap Index as the bottom layer index which provides the investment universe. Then the fund construct 4 sub-indexes with seperate methodologies. Lastly, the fund combine 4 sub-indexes and get a fund index. The second and third indexes are developed by Goldman Sachs. I checked both Solactive Index and the ETF’s holdings, the Solactive Index has 493 holdings, but the ETF has only 44o holdings. This is becase some stocks are allocated to zero weight after the screening process.

3, The Goldman Sachs US Large Cap Euqity ETF (GSLC) utilized a 4-factor model: Value, Momentum, Quality, Low Volitility. These 4 factors are equally weighted in the final index. These 4 factors in a higher degree played a weight tilt role rather than screening role. So that even 4 factors are applied, 90% stocks in the investment univers (base index) are ketp in the ETF. Some other smart beta funds use multi-factors as multi-layer filter, so the final holding numbers are very concentrated relative to the initial investment universe, such as QVAL (only 41 holdings) and OUSA (147 holdings).

4, The ETF utilized a “Turnover Minimization Technique”, which is pending patent, to decrease the trading cost. So when rebalancing schedule comes, the fund has some discretion to decide the amount of adjustment within the buffer range.

Why do I say Goldman Sachs’ entry is a milestone for the ETF market? Because it is the most infuential power in the financial industry. It has all the resources to enter the ETF markets at any time. But it didn’t do that until 2015. This is an persuasive evidence that Goldman Sachs realized ETF is the market trend you cannot ignore. I like Goldman Sachs becasue of its innovation. I beilive its joining with make the ETF markets much more exciting and prosperous.

Will Bank of Canada Cut Rate Tomorrow?

Tomorrow morning at 10:00AM, Bank of Canada will announce interest rate decision. The BOC governor Stephen S. Poloz will speak to the press at 11:15AM. Will he make the rate cut happen the third time in one year?

The markets’ guess is 50/50. My perception is that the probability of rate cut is relatively high. Here is some personal thoughts.

Firstly, it seems that Bank of Canada doesn’t care much about the depreciation of Canadian dollar. I watched his speech at the Mayor’s Breakfast in Ottawa on Thursday, January 7th, 2016. He spoke quite frankly, weak Canadian dollar will “spreads the impact of the loss of income across the entire economy, rather than leaving it just in the commodity-producing sector”, which means the BOC’s first priority is to boost the economy and save the businesses, at the cost of currency depreciation. At the same time, Canadian dollar still some room to depreciate towards its historical low of 0.6179 on Jan 21, 2002.

CADUSD Historical Chart

Data sources: Bank of England, Bank of Canada

Secondly, the CPI is still below the midpoint of the control range. Inflation is one of the four core function of Bank of Canada’s mandate. Currently the target range is 1~3%, the latest reading was 1.4, represented November 2015. Lower interest rate will push CPI go higher.


Chart source: Bank of Canada website.

Thirdly, lower rate will support the house building related industries and keep the jobs. Now house building is one of the very few industries still have some growth momentum. Although there are a lot of concerns in regards to the hot property markets in Toronto and Vancouver, but the rest of Canada are still tepid. Alberta’s housing prices decreased substantially in 2015. Affordability and debt ratio are true concerns, but are not urgent and still controllable.

Finally, lower rate will also benefit the financial industy. As the largest and most profitable industry in Canada’s economy, any policy will undoubtly consider its impact to the financial industry. Superficially, lower rate will narrow the lenders’ spread. But when we look from a broader perspective, if the lower rate will boost the economy, banks definately will be the biggest beneficiary. On top of that, according to the new rules of bank capital, most of the banks will have to raise funds from the market, loose monetary policy will help the banks to sell shares or bonds at high prices.

Absolutely there are equivalent or more reasons the Bank of Canada will not cut the rate. I just want to take a side and make the watch of tomorrow’s announcement have some excitiement.




Invest in specific country/territory: Bermuda as an example

Last week I took a short visit to Bermuda, a beautiful tiny island in the Atlantic Ocean. The experience was quite impressive.


Photo by Kai Cheng, Jan 11, 2016 at Bermuda

Althout this British overseas territory has only 56 square kilometers area and 65,000 population, but it was very well developed. People are very welcome and helpful. Cities (Hamilton and St. George) are clean and organized. Services are reliable and trustable. Tap water is crystal clean and drinkable. I didn’t feel any difference as in Canada or the United States.  I feel safe and comfortable there.

I also bought a book “The Story of Bermuda and her People (Third Edition)”in a local bookstore to know more about the isles and have some eye-open discoveries. It is the most isolated island on the globe, but it was settled by human beings since 1609. It has the long-last constituency system and justice system. Its GDP per capita is higer than the United States. It issues its own currency, has its own securities exchange, and is the largest offshore insurance/reinsurance centre in the world. I understood that Bermuda’s success doesn’t come from its beautiful natural scenery, but from its stable and reliable governance and legal system. This is the first point investors will consider before the put money in.

But what does all of these relate to ETF?

As an ETF enthusiast, I’d like to link many thinks to ETF. If I want to invest in Bermuda, can I implement this idea by the vehicle of ETFs? The answer is yes. I searched of ETFs with Bermuda exposure and found it refers to 144 ETFs which was really surpringly much. I picked one with symble SEA and digged some distance further.

SEA is the Guggenheim Shipping ETF, issued by Guggenheim investments, a US asset managemtn company. From the fund’s SEC Form N-Q, I found the detail of this fund’s exposure to Bermuda:


Bermuda ETF

It shows the fund has 24% percent exposure to Bermuda. Actually among these holdings, most of them are not physically operating in Bermuda or listed in Bermuda securities exchange. They are incorporated in Bermuda, but cannot reflect Bermuda’s economic activities. Let’s have a closer look:

1, COSCO Pacific Ltd. This is a container shipping company controlled by a Chinese state-owned company. It is listed at Hongkong Stock Exchange with trading code 01199. The majority of its business is in mainland China.

2, Nordic American Tankers Ltd. The company was incorporated in Bermuda in 1995 and listed on NYSE by the symbol of NAT.

3, Ship Finance International Ltd. It is registered in Bermuda as a limited liability company. Its shares are trading on NYSE by the symbol of SFL.

4, Stolt-Nielsen Ltd. It is registered in Bermuda but headquatered in Rotterdam.Its shares are trading with the symbol of SNI on Oslo Børs, the stock trading exchange in Norway.

5, BW LPG Ltd. The company is registered in Bermuda and listed on Oslo Stock Exchange with the ticker BWLPG.

6, Tsakos Energy Navigation Ltd. The TEN company is incorporated in Bermuda, managed out of Athens Greece, and listed in the NYSE under the symbol TNP, and in the Bermuda Stock Exchange (BSX) under the symbol TEN.

7, Avance Gas Holding Ltd. The company is registered in Bermuda. It becomes a publicly listed company on Oslo Stock Exchange on April 15th 2014, trading under the ticker AVANCE.

8, GasLog Ltd. The company is registered in Bermuda, headquartered in Monaco, listed on the NYSE with the symbol GLOG.

To sum up all the information collected above, there are a few takeaways. Firstly, with the prosperity of ETFs, more and more country/territory specific products are created, investors have much better accessibilities; Secondly, as there are so many funds expose to the same country/territory, screening is a must have skill. Lastly and most important, to make sure you get the right exposure you want, it’s imperative to do the due diligence work, read the index methodologies, review the holdings.