Canadian Active ETFs Poised For Growth

As the Active ETF space in the United States has grown quite rapidly in recent months, with total assets in excess of $270 million as of March 1, 2010, the Canadian Active ETF space is still in relative infancy. Where the US market currently has 5 distinct players in the field, with lots more lining up to launch Active ETFs, the Canadian market is monopolized by just one player - Horizons AlphaPro, managing around C$100 million in these products.

Why is there potential in the Canadian market? - The Canadian mutual fund industry managed around $584 billion in assets as of Jan 2010, according to the Investment Funds Institute of Canada.  While that looks small relative to the $12 trillion US mutual fund industry, if you take into account that Canada's population is 1/10th that of the US, the figure makes more sense. Here's another fact, this study from July 2007, which received a lot of attention, concluded that Canada's mutual fund industry is the most expensive in the world for investors. The average Canadian equity mutual fund had an expense ratio of 2.56%, compared to 1.29% worldwide and 1.11% in the US. While the numbers have likely improved since then, Canada is quite likely still one of the most expensive places to purchase a mutual fund. And that's what should make an ETF structure all the more attractive to Canadians, given all their advantages, and especially the cost efficiencies they provide over mutual funds.

Despite this, the only player in the Canadian Active ETF space is Horizons AlphaPro, which started off by launching a managed S&P/TSX 60 ETF in Jan 2009. Since then, they have launched a seasonal rotation product, the popular Gartman ETF - run by Dennis Gartman, and recently 3 more conventional value, dividend and growth strategies managed by well-reputed Canadian money managers. As an industry though, there are only 4 main ETF providers in Canada - Claymore Investments, Horizons, BMO Financial and iShares. And of these, Claymore has already indicated their disinterest in the Active ETF space. That leaves the arena wide open for an issuer to challenge AlphaPro's monopoly, which they are clearly enjoying seeing how a majority of their Active ETFs are able to charge a hedge-fund style performance fee, on top of a management fee.

Disclosure: No positions in above-mentioned names.