When trading
resumes [after an
unintended shutdown
of an exchange], any
gap that may exist
between the ETF
price and its market
value will be narrowed
and closed. The
model is resilient.Pat Dunwoody
CEO of the Canadian
Exchange-Traded Fund
AssociationThe marketplace is
slowly moving towards
the conformity of a
wider, sustainable
approach, and to
measurability. We’re
starting to see
providers offering
tangible measurement
of the ESG approach
itself.Mark Raes
head of product at BMO Global
Asset ManagementThe mandate of the
Canadian ETF Association
(CETFA) is to support the
growth, sustainability and
integrity of Canada’s ETF
industry. CETFA aims to
provide greater depth of
ETF education to advis-
ers and investors about
their usage, to deal with
industry specific issues,
whether regulatory or
structural, that affect all
member firms and to
create broader awareness
about ETFs outside the
industry.ETFs emerged out of the
index investing phenom-
enon in the late 1980sand
early 1990s.Since these pioneering
ETF endeavours, the
investment vehicle has
caught on in popularity.
It is now clear that ETFs
provide several important
benefits to investors:LOW COSTLIQUIDITYDIVERSIFICATIONTAX EFFICIENCYOPERATIONAL
EFFICIENCYACCESSIBILITYTRANSPARENCYFLEXIBILITY“The fact that there’s competition
generally means improved service,
additional transparency on data,
driving innovation and ultimately- we hope – reduced costs for inves-
tors,” says Erik Sloane, NEO’s chief
revenue officer.
The NEO exchange has three pri-
mary businesses: taking companies
public and listing ETFs; trading;
and market data. This is particularly
important when it comes to ETF
trading and valuations.
“We have learned that via discount
brokerage platforms, investors and
financial advisers have access only
to the listing market’s data,” says Mr.
Sloane. “If I look at XIU (iSHARES SP
TSX 60 INDEX ETF) on our website,
for example, it shows the volume
split across multiple Canadian
markets. The TSX represents 58 per
cent of the volume traded, which is
unfortunately all of the information a
financial adviser would see on their
screen. In our view, showing only a
fraction of the information to inves-
tors is the real issue.
“But if I look at VGRO, Vanguard’s
Growth ETF Portfolio, it gets worse.
For example, the UN Principles
for Responsible Investing (PRI) has
helped by providing a framework of
17 sustainable development goals
that asset managers may use to clas-
sify investments and identify issues,
he adds.
Thirty years of ETF product
development has brought a vast
spectrum of options to the market,
and similarly, there are many differ-
ent ways to construct ESG portfolios.
“Spending a few minutes to
make sure that your investment
actually aligns with your personal
values is a very important step in
the process,” stresses Mr. Raes. “Are
you looking for something that
is more exclusionary, or are you
looking for something where you’re
participating in improvement in the
marketplace?”
While the earliest ESG funds
excluded controversial investments,
and many still do, newer options
include all sectors and use active
ownership to influence company
ESG performance. “It’s critical to real-The TSX represents only 27 per cent
of the volume traded today.”
That means that a financial adviser
or an investor trading through a
discount brokerage account would
not see the other 73 per cent of
the volume traded, Mr. Sloane
explains. “That’s a problem, as the
outage last week demonstrated – as
financial advisers and retail inves-
tors, we should have access to all
the information that may affect an
investment decision. This is particu-
larly relevant for the ETF industry
as volumes are heavily fragmented
between markets. Advocating, and
ultimately doing what’s right for
long-term investors, is one of our
mandates as an organization.”
The NEO information offerings are
just one more in a series of factors
that make ETFs a remarkably effi-
cient way to achieve exposure to an
asset class, says Ms. Dunwoody. And
Canadians are catching on: it took 26
years to reach $100-billion in assets
under administration, and just four
years to reach $200-billion.For the
past two years, ETFs have outsold
traditional mutual funds in Canada.ize that active and passive investing
are similar in that way,” he says.
Driving change has become much
more of a focus, particularly in
Canada, where mining and energy
make up an outsized portion of
the overall economy. “Positively
impacting the entire marketplace to
buildbetter practices and sustain-
able approaches versus low-carbon
investing is a critical decision point,”
Mr. Raes notes.
One of the most common percep-
tions is that aligning investments
with social and environmental
factors means sacrificing returns, he
says, something that is no longer
necessarily true. “What we see with
today’s ESG investing approach,
where it’s far more about improving
companies as opposed to exclud-
ing them, is that there really isn’t a
performance gap.”
Another misconception about
ESG investing is an understanding
of the effects of measuring these
factors, adds Mr. Raes. In other
words, it isn’t merely about doing
good, but about managing risk. “If
we take Volkswagen as an example,
investors are waking up to the idea
that companies with ESG issues in
fact are suffering when it comes to
financial performance.”
The transparency, diversification
and lower fees long associated with
ETFs make all of these consider-
ations less daunting.
Investors also tend to focus on
equity investing when considering
ESG, which is an oversight, says Mr.
Raes. “We’re using ESG ratings to
identify corporate issues to invest in.
The fixed income side is an emerg-
ing space that is going to be just as
important going forward – and will
evolve further with the issuance of
green bonds and other initiatives
still in their infancy.”ThirtyyearsofETFproductdevelopmenthasbroughtavastspectrumofoptionstothemarket,and
similarly,therearemanydifferentwaystoconstructESGportfolios.ISTOCK.COMWhenatechnicalissuestoppedtradingontheTorontoStockExchange(TSX)onFebruary27,2020,investorsheldtheirbreath–butETFscontinuedtobetraded
throughotherexchangesandtradingsystems.TheeventillustratedtheimportanceofbeingawareofothertradingoptionsinCanada–italsounderlinedthefactthatthe
ETFmodelwasdesignedtoberesilient.Source: neostockexchange.comn March 9, 1990, the world’s
first ETF launched on the
Toronto Stock Exchange as TIPs,
the Toronto 35 Index Participation
Fund. Thirty years later, it’s possible
to invest in nearly 8,000 ETFs in
70 markets in 58 countries around
the world. It’s a milestone year for
Canada’s ETF industry, with $200-
billion in assets under management,
and record new purchases of more
than $27-billion in 2019.
Perhaps somewhat ironically,
however, exchange-traded funds
had an opportunity to demonstrate
the resilience inherent in their
design recently, when a technical
issue stopped trading on the Toronto
Stock Exchange (TSX) on February
27, 2020.
While even some of Canada’s
mainstream media sources seemed
unaware of the fact, the event was
an important reminder that–even
if one exchange is not functioning–
ETFs continue to be traded through
other exchanges and trading sys-
tems, says Pat Dunwoody,CEOof
the Canadian Exchange-Traded Fund
Association (CETFA).
It’s a critically important detail.
The S&P 500 Index fell 2.2 per cent
after the TMX halt, and the theoreti-
cal S&P/TSX Composite Index was
estimated to be 1.21 per cent below
its halted level. Since ETF net asset
values are calculated based on the
closing price of their underlying
securities on the TSX, the gap is
problematic. ETFs continued trading
on other exchanges, which meant
that the closing price – based on the
last trade on the TSX specifically –
could deviate significantly from their
true value.
But the ETF model was designed
with these kinds of events in mind,
allowing for a “fair value” when the
official close cannot be determined,
stresses Ms. Dunwoody. “When
trading resumes, any gap that may
exist between the ETF price and its
market value will be narrowed and
closed.
“The model is resilient. These
kinds of events do not undermine
the demonstrated benefits of ETFs,
which include low trading cost,
tax-advantaged returns and a wide
range of options.”
Another lesson from these recent
events is the importance of being
aware of other trading options
in Canada. For the last five years,
for example, the TSX has had
meaningful competition in the NEO
Exchange, founded by a collective
of Canadian pension funds and
financial institutions.
ESG ETFs? At first glance, it looks
like the worst kind of insider-jargon
“alphabet soup.” But unroll the acro-
nyms and – for the ever-increasing
numberof investors concerned with
the environmental and social impact
of public companies – it’s just an
elegant solution.
ESG investing, also known as
socially responsible or green invest-
ing, has been around a long time,
but has been plagued with issues
and misapprehensions.
In the “issues” column, compar-
ing and measuring ESG perfor-
mance has always been problemat-
ic, says Mark Raes, head of product
at BMO Global Asset Management.
“What does ESG mean to you? What
does it mean to me? And does that
agree with a third person on the
street?
“The marketplace is slowly mov-
ing towards the conformity of a
wider, sustainable approach, and to
measurability. We’re starting to see
providers offering tangible measure-
ment of the ESG approach itself.”
30yearsofETFsinCanada
Celebrating the anniversary of a world-changing Canadian financial innovation
THE BENEFITS
OF ETFsABOUT CETFAO
CANADIAN
ETFsFLEX THEIR
RESILIENCE
ALIGNING INVESTMENTS WITH YOUR VALUES
ETFs ARE HERE FOR YOU
CanadianETFAssociationCANADIAN ETF
VOLUME BY
TRADING VENUE
OWNERSHIP
- JANUARY 2020
NEO
21%
CSE
2%
OMEGA
2%
TSX
41%
NASDAQ
34%
SPONSOR CONTENT PRODUCED BY RANDALL ANTHONY COMMUNICATIONS. THE GLOBE’S EDITORIAL DEPARTMENT WAS NOT INVOLVED IN ITS CREATION.