While the Canadian ETF can be a lot like the U.S. ETF market, it’s very different in many ways. While the U.S. market is much larger, Canada has been able to introduce a number of products available to investors that face regulatory hurdles in the States. Michael Cooke is an experienced figure in the ETF space for the past 20 years and current board member of the Canadian ETF Association (CETFA), which aims to grow and protect the integrity of the Canadian ETF industry. He joins the ETF Think Tank to discuss the two North American markets and where innovation will take them next.
Why does Canada seem to have an easier time bringing products to market? Cooke recognizes that the U.S. ETF market is much larger, more mature, more liquid, and perhaps fostering more innovation. In contrast, je believes that Canada benefits from a regulatory environment that encourages innovation, whereas the SEC tends to be more deliberate. Canada’s early introduction of certain products was facilitated by regulatory, giving them a head start that the U.S. is working to catch up on.
Does that mean the U.S. is doing a better job of protecting investors? Cooke says that it’s not better or worse, it’s just different. He notes that Canada makes sure that there’s enough transparency for efficient trading and hedging. Canada has also proven that this undertaking is being approached prudently and has been serving investors well. The regulators are taking a bit of a different tactic, but it’s evolving over time.
Cooke explains that the most popular products in Canada are in the mutual fund structure and are built as complete portfolios. In the past, Canadian investors often had to go across the border to find various exposures for their portfolios. Today, however, the Canadian market has done a much better job of offering solutions at home. He says that if they can customize products that serve the needs of Canadian investors, it’s a good thing.
While the U.S. ETF market does enjoy certain tax advantages that Canada doesn’t, Cooke doesn’t think it’s a massive difference. ETFs in the United States are known for their tax efficiency and 95% of them have never had a capital gain distribution, an advantage that Canada doesn’t enjoy to the same extent. Well-managed products, however, should result in minimal distribution. Canada does have some advantages, such as cross-border withholding taxes, but as the market matures, advisors should have the ability to mitigate a significant portion of the associated risk.
The banking system in Canada operates quite differently. It is a relatively stable system, albeit with a somewhat oligopolistic structure, it’s secure. While Canada has the ‘Big 6’ banks, there are a lot of smaller players. The United States could be headed in a similar direction as Canada where there’s more concentration at the top. Despite ongoing debates about liquidity, stability, and efficiency, the Canadian system has proven itself time and again.
What’s the next big “first” in the industry? Cooke says that the concept of covered call strategies has resonated well with Canadian investors. There may come a point where a broader array of cryptos get placed into ETFs. Notably, there’s some interesting innovation happening in blockchain. He would like to see the market evolve to the point where we customize products that cater to a specific distribution channel, e.g., institutional vs. retail.
Other key takeaways:
- The CETFA organization operates as a simple, non-profit structure, drawing membership fees from legal firms, custodians, individuals, etc. It involves volunteer work that’s done on a part-time basis.
- Ten years ago, the top Canadian ETF issuer had 84% market share. Five years ago, there were 3 issuers that accounted for that same share. Today, it’s the top 7 issuers. The Canadian ETF industry is still in its infancy and will continue evolving. In Canada, you need to have boots on the ground and a local presence.
- Has anybody tried cross listing? Canadian issues have gone south of the border, although not with cross listing. There are some tax issues that could present risk. If you have a core competency, there’s no reason you couldn’t export it into the U.S. market.
- The approval of Bitcoin ETFs from Canadian regulators did not happen overnight. A lot of managers use futures to hedge risk and Canada determined this was adequate to address some risks. The Canadian regulators have taken a very prudent approach in their dealing with Crypto, recognizing their enduring presence.
- Canada offers money market ETFs that trade at a stable NAV. Implementing a similar structure in the U.S. might present challenges for the SEC, potentially requiring careful consideration.
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