Introduction To ETFs – David Barber

May 25, 2017

[An Introduction to Exchange Traded Funds (ETFs)]

Hello, everyone. Thank you for joining us today. On behalf of CIBC Investors Edge, I would like to welcome everyone to webinar with David Barber. My name is Omar and I will be your host for this event. Now, just a few things to note before we get started. 


CIBC Investor Services Inc. does not provide investment or tax advice or recommendations. Everything we share today is for education purpose only. We are recording today's session and a replay will be available on our website. You will find the link to the replay on our home page. 

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[SPEAKER David Barber Vice President National Accounts, First Asset]

Today we are very excited to present an introduction to ETF's webinar where we will cover ETF basics, benefits, best practices, and more. We're thrilled to have David Barber as our speaker. Dave is vice president of National Accounts at First Asset ETFs. With over 20 years of experience in the financial sector, David is responsible for maintaining key relationships for First Asset ETFs and regularly works with ETF analysts, portfolio managers, investment consultants as well as with the self-directed investment channels. With great pleasure, please join me in welcoming David Barber. Thanks, Omar. I want to thank you all for taking the time today. 

[An Introduction to Exchange Traded Funds (ETFs)]

Wherever you may be logging in across the country.

[David Barber, Vice President, National Accounts Prepared for CIBC Investors Edge]

Certainly in Toronto it's a great day for a webinar given our weather. Great to see such a great turnout and hope you will find its time well spent. As Omar mentioned, my name is David Barber, I'm vice president, National Accounts at First Asset. Over the next 45 minutes or so, I want to provide an overview of ETFs in Canada with our webinar entitled An Introduction to Exchange Traded Funds. 


Here's a brief disclaimer for today's presentation. 


Turning to today's agenda, here's what I will highlight today. First, I will discuss my company, First Asset, and what makes us unique among ETF providers in Canada. We'll look at what an ETF is, and why you should invest in them as well as some of the potential pitfalls. We'll touch on the structure of ETFs, the creation and redemption process, how they are valued, how they trade, ETF liquidity, the impact of fees and best practices when buying and selling ETFs. We'll then take a look at how the industry in Canada has grown and the outlook for ETFs going forward. Finally, we'll highlight different flavors of ETFs and how they've moved beyond simple market capitalization weighted models to smart beta to active strategies. I will then wrap things up and we'll leave some time for any questions that you might have. 


So about First Asset, we are a Canadian ETF provider. We were founded more than 20 years ago in 1996 and we launched our first ETFs in 2011. At the time, we were one of only six other ETF-focused companies in Canada. About a year and a half ago, we were acquired by CI Financial who is one of Canada's largest independent Canadian asset managers with about $160 billion in assets under management and administration. They've been a great partner for us and the transaction will be instrumental in enabling us to prosper given the increasing competition in terms of new entrants as well as the sheer number of ETFs. As I mentioned, there were six providers when we launched back in 2011. There are now 22 in Canada with two more to follow within the next month or two, and just since the start of February, there has been more than 30 new ETF product launches. First Asset manages about $3.1 billion in ETF assets in more than 50 ETFs and we've been a leader in the active ETF space whether smart beta ETFS which you've probably been hearing a fair bit about lately and which we consider to be active strategies or traditional active ETFs with portfolio managers overseeing their mandates. We've got industry leading managers running the strategies like those from CI Cambridge and CI Signature as well as other third party managers like IEX. As well we have relationships with the world's leading index providers in Morning Star and MSCI. Our innovative products have enabled us to incrementally increase our market share in this competitive environment. 

[What is an ETF?]

So, what is an ETF? ETF stands for exchange-traded fund as I'm sure you're aware. Technically in Canada, an ETF is a mutual fund. That being said, there are some important distinctions. Most ETFs are securities that track an index, for example, ETFs like Composite or the SMP 500 or may be a commodity like gold, but trade like a stock on an exchange. They're bought and sold on an exchange like the TSX. Like a stock they can be bought and sold throughout the day, and like a mutual fund their valuation is based on the basket of assets that underlies the index. The price of an ETF changes throughout the day as it is bought and sold, while a mutual fund calculates its net asset value only at the end of the day. Like mutual funds, the evaluation of an ETF is based on the value of the underlying assets that make up the ETF. That asset value is simply the total value of a fund's assets minus their liabilities. 


So now let's take a look at some of the pros and cons of investing in ETFS, and we'll look at why these vehicles have been increasing in popularity. I think the first thing most investors are aware of and appreciate ETFs are low cost. So this applies to simple beta, factor, and active ETFs. Typically cheap index products cost anywhere from 5 to 50 basis points or 0.5%, while active and smart beta strategies may range up to from 35 to 90 basis points. This is compared to about 125 basis points or 1.25% for an F class mutual fund. They have trading flexibility and liquidity and an investor can trade intraday with real time pricing as opposed to accepting end of day NAV like a mutual fund and that NAV is unknown really until the trade happens. ETFs can also be more liquid than individual securities. ETFs are also transparent providing visibility of holdings and their weightings daily although active ETFs typically only show the top 10 holdings between quarters. ETFs have a tax-efficient structure. Since most are passive, they don't trade as much, so they don't turn over much and incur capital gains like mutual funds. When a mutual fund investor asks for their money back, the mutual fund must raise cash to meet that redemption and may have to sell securities which may incur capital gains which then have to be paid by all investors in the fund. When an ETF investor sells his or her shares, they simply sell them to another investor in the market incurring no capital gains. They're also great tools for asset allocation and then investors can invest in sectors, in countries, commodities or factors to build institutional type portfolios very inexpensively. ETFs combine the range of a diversified portfolio with the simplicity of trading a single stock and investors can purchase ETF shares on margin, short sell shares, or hold them for the long run. On the other hand, the intraday liquidity may be encouraging excessive trading by ETF users who can be their own worst enemies as they stray away from buy and hold philosophies. Many ETFs are based on market capitalization weighted indexes which as we'll discuss later can be prone to concentration risk as the out-performance of one or two stocks or a sector may lead to large over weightings to these areas. Bid-ask spreads can sometimes be large on ETFs which is often due to the flaw. As we'll discuss shortly, this is generally because the bid-ask spreads on the underlying securities that make up an ETF at large. The reality is that when buying a mutual fund, investors get end of day NAV which has bid-ask spreads embedded in as well, it's just not as transparent as ETF. One thing I should point out in defense of mutual funds is often when the cost of mutual funds is compared with ETFs in the media, it's not an apples to apples comparison. The often quoted 2.5% MER for the average mutual fund includes the cost of the investment advisor's fee, generally where say, a 50 basis point MER for ETF does not include advice from an advisor given that most of you here manage your own money, or at least a good part of it, a relevant comparison would be between an F class mutual fund and an ETF. In this case most F class mutual funds would be 1% or so cheaper than the 2.5% commonly cited in the media. I'm also here, or not here I should say to say that ETFs are great and mutual funds are bad, they're really just both delivery mechanisms enabling investors to construct more diversified portfolios more easily and inexpensively. 


So let's look at the net asset value or NAV of an ETF. This is a pretty simple example of how an ETF is valued, simply a sum of the parts. In this case each file here is used to represent an ETF's holdings, each represents a stock. Simply adding up the sum of the parts gives you the price of the ETF as the price of each constituent changes so does the overall price of the basket or ETF. And fair value of an ETF is determined by looking at bid and offer or ask prices of each underlying security, put the value of each stock together and divide by the number of outstanding units, and you get the value of the basket, and hence the price of the ETF, in this case, 11.35 when you add up all those files. 


So let's look at trading, subscriptions and redemptions. The creation/redemption process in ETF trading is an important one to understand. First let's consider the key parties. At the bottom you have the ETF provider, in this case First Asset as an example, above that the ETF market maker or designated broker or DB who in Canada would be any of the major banks, with the exception of Scotia, all of them have ETF trading desks and they make markets on ETFs and the reason they do that is that they make a very small profit, say a penny or two on every trade. At the top in the middle you have the exchange, in our case the TSX, where shares of the ETF are distributed and traded. And then finally, you have individual investors, buyers and sellers of the ETF units. There are two types of ETF liquidity. Primary liquidity which is a part of the market that deals with the issuance of new shares of an ETF which is really where the real ETF liquidity resides, and then secondary liquidity... Which is the part of the market where investors buy ETFs from other investors. So ETFs do not create new units every time money flows in. ETFs trade on an exchange like close-ended funds but they are open-ended. New shares are created to meet investor demand. And when a new ETF is launched, the provider will issue a block of shares called a PNU or prescribed number of units, typically in multiples of 50,000 shares in exchange for a basket of securities from the market maker in the same weights as the underlying index of the ETF market fault. The market maker can then buy and sell the units on the exchange at a price close to fair value or net asset value to the investing public. If a small investor wants to buy like $2,000 worth of an ETF trading at $20, the market maker will simply fill the order with 100 shares from its inventory. This is secondary liquidity. In this case, the market maker will purchase the funds, underlying holdings in multiples of the PNU. I'm sorry, when a larger investor wants to buy more shares than the market maker has in inventory, then they would create new shares of the ETF which is again primary liquidity. In this case, the market maker will purchase the funds, underline holdings in multiples of the PNU, and deliver them to the provider who would then exchange them for units in the ETF. They can then provide the necessary volume to this larger client. And then the same process happens in reverse in the event an investor wants to sell the ETF. They give back the units to the ETF provider in exchange for the basket of securities. It should be noted that both creations and redemptions are generally deemed to be in-kind transfers, that means it makes the process tax efficient. In both cases, they simply exchange a basket of securities for shares of the ETF with no sale of securities, therefore no capital gains to distribute to unit holders. The ETF provider can even pick and choose the shares to give to the designated broker, meaning it can hand off shares with the lowest cost base and therefore potentially reduce the unrealized capital gains that may have accrued in the portfolio and reducing the potential for realized capital gains down the road the unit holders will have to pay tax on. This may be a little bit difficult to follow on the first go around. For a greater understanding, you can visit the CIBC Investor's Edge ETF center. They have a great video in the Morning Star ETF classroom for understanding the ETF structure video, so I highly recommend that you visit that if you didn't quite follow on with this. 


Further in the last slide the market maker, who again in Canada is one of the banks, CIBC and the other big banks are all very active in making markets for ETFs. Market makers create goal posts around fair value or net asset value of the ETF... Which is based on current bid-ask spread of the underlying securities. In this case, in the centre of the example the ask or selling price is 1996 and the bid or buying price is 1987 so a nine cent spread. Other buyers and sellers, in this case they'd be typically individual investors, they can post bids and offers inside these goal posts which would then obviously tighten the spread of the ETF in this example. 


So ETF liquidity has really been compared to the proverbial tip of the iceberg. The part that's submerged represents the true liquidity of the underlying securities which makes up most of the ETF's liquidity, so one very important thing to remember if you remember anything else in this presentation is that trading volume of an ETF does not necessarily equal its liquidity like it generally does for a single stock. The reason is that a single stock has a finite number of shares so when there is more demand for the shares, they increase in price, and if there is less demand, they decrease in price. For an ETF, there is potentially an infinite number of shares because of the ability to create and redeem shares by the market makers or the DBs as discussed on previous slides. So demand for an ETF will only impact the price of that ETF if the trade is large enough to have an impact on the underlying stocks or assets that make up the ETF. In this example, if the stocks that make up an ETF are not very liquid as shown on the left, the ETF will, not surprisingly, not be very liquid as well and will have wider bid-ask spreads. On the other hand as shown on the right, if the underlying constituent companies that make up an ETF are very liquid, then the ETF will also be very liquid and will trade with narrow bid-ask spreads. 


To more clearly, I hope, illustrate the point from the previous slide, this is a Bloomberg terminal screenshot from one of our ETF traders on a trade we had executed on one of our ETFs, symbol FLB shown on the top left hand corner which is a long duration bond ETF. Prior to the trade, this ETF had about $18 million in assets. You can see that at 3:18pm, the market was 1996... Just under the highlighted part, 1996 and $20.01, so $0.06 and that's just underneath the highlighted trade. There were 2,500 shares on the bids of 25 of those, the 25 would have 2 zeros behind it in terms of the number of shares, and then the offer, there were 20,000 on the offer. And then seven minutes later at 3:25, that is the highlighted part, a trade for 870,000 shares over a notional value of 17.5 million was executed at $20.5 cents or actually inside the bid-ask spread. So the trade did not impact the price of the ETF or the underlying securities. And in fact, this trade had no impact on the price of the ETF and by extension, the underlying securities while effectively doubled the size of the ETF since it went from 18 million to almost to a little over 35 million on this one trade. So I hope that gives you a better understanding of how these things work. I think it's also worth noting as well that increasingly more and more trading of stocks and ETFs is happening on alternative stock exchanges and not solely on the TSX. And this means often ETFs that you're looking at trading may actually be trading a lot more volume than they appear to if one only looks at the TSX volume and not the consolidated trading on all exchanges. I'd say, generally, often the volume is gonna be understated by as much as 30% or 40%. 


This slide illustrates the impact of fees on investment. Obviously, everything else being equal, the lower cost investment will outperform the higher cost investment. In this example, the growth of an initial $500,000 investment made into two funds is shown. In both examples, a 6% compound rate of return is assumed over a 30-year time horizon. Investment in fund B shown in black, potentially an F class mutual fund that charges 125 basis points at 1.25% grows to just under 2.1 million over the 30 years. In contrast with investment in fund A shown in red... This would be for example an ETF that charges 30 basis points. So a difference of 95 basis points per year between the two grows to almost $2.8 million. So over the 30 years that equates to a difference of about $680,000 or $180,000 more than the initial amount of the investment. This is really another example of why ETFs are becoming more popular with investors globally. 


There are few general guidelines for buying and selling ETFs, best practices. Avoiding trading in the first 15 minutes or the last 15 minutes of the trading day, it's generally a good idea to avoid to, excuse me, allow some time to pass before trading in the morning, and to avoid waiting until the last minute to wrap up your buy and sellers in the afternoon. Not all of an ETF securities may have started trading in the first few minutes of the trading session, so the market maker may not be able to accurately price the ETF basket and that leads to wider spreads. Conversely, as the end of day nears closer to market close, market participants generally try to limit their risk so again spreading wide. Point number two here, consider using limit orders, not market orders. Limit orders give you more control by letting you determine the maximum price which will execute in ETF trade. However, depending on the price you set, there is some risk that your order won't be fully executed or executed quickly. You should exercise caution when using stop loss or market orders. Market orders don't provide price protection since the overriding objective is to execute the trade, and you might end up owning some of your shares that are priced substantially different than from the net asset value in a less liquid ETF or in a volatile market. The benefit of a stop loss order in theory is that you may be able to limit your downside, if for example you're away on holidays or won't have time to monitor your portfolio. However, if you're more of a buy and hold investor, you may be locking in your losses in the short term if stocks fall below the stock price, and then may be subsequently redeemed. As well stop losses may also sell units at the best available price not necessarily the price you put in for the stock, meaning, you could end up selling units at prices well below the stop loss. Now typically ETFs with substantial trading volume and their bid-ask spreads may appear to offer superior liquidity, however, the average daily trading volume or ADV is not the only gauge of an ETFs' liquidity, you should also be mindful of liquidity of the ETFs' underlying securities which is a factor that becomes more important as trade sizes increase. 


As you may have heard before, Canada was actually ground zero for ETFs. The first ETF product TIPS which tracked the largest companies in Canada at the time was launched back in 1990, and that was actually three years before the first ETF was listed in the US. This chart represents the growth of ETFs in Canada since 2004 both in raw numbers of ETFs and assets within. As you can see in 2004, there was less than 10 billion in ETF assets in only 3 ETFs. And as of the end of September of 2016, there was over 107 billion in 441 ETF's, so in excess of 20% annualized growth. An up-to-date snapshot would show there are currently about 127 billion in ETF assets and about 530 strategies in Canada, so we've grown almost a further 20% just in the past 8 months. While the growth has been significant, ETF adoption is much lower in Canada than it is in the US. US ETF assets are about 3.3 trillion in Canadian dollars. So given they are 10 times bigger, if ETFs were being adopted in the same way, we'd have more than 330 billion in ETF assets now. So in theory, we have a lot of catching up to do relative to US adoption. That being said, in the past it often made a lot of sense for Canadian investors to use US listed ETFs for a significant portion of their ETF exposure because there is really a lot more choice and the fees were a lot lower. This is no longer the case as the ETF lineup domestically is a lot more robust, fees are competitive. And in most cases, it makes more sense for Canadian investors to hold Canadian listed ETFs, both from a tax perspective as there can be additional withholding taxes on US listed ETFs, as well as the cost of currency conversion when buying and selling as well as on dividend distributions. 


Let's take a look at how ETFs were expected to grow in this survey of asset managers by Price Waterhouse took place in late 2015. Almost half of those asked thought that global ETF assets would reach 7 trillion US by 2021. Considering that globally ETF assets went through 4 trillion US at the end of this year. Their predictions appear to be pretty conservative. 


Here's a look at how ETF assets are distributed by asset class in Canada. Given they've typical 60/40 equity bond portfolio, not surprising that assets in ETF breakdown are pretty close to those parameters. And I think it makes some sense that equities represent proportionally more than 60% and a bit over 66% because equity ETFs actually had a fair head start in the market compared to bond ETFs. As I mentioned the first one launched back in 1990. As well Canada's largest ETF is an equity ETF, XIU which has over 12 billion in assets, so just one ETF alone makes up almost 10% of the total ETF assets. Commodity and other ETFs, leveraged and inverse ETFs make up the remainder at about 2.7%. 


ETFs have come a long way since they debuted in Canadian markets back in 1990. Initially, they were just benchmarks created to represent the market that could be used for active managers to compare their relative performance, then they were used by investors to get exposure to the markets cheaply. Examples being XIU as just discussed their exposure to TSX composite The next iteration of ETFs were equally weighted ETFs, so equal exposure to all companies within a given index, which provided more exposure to smaller companies. In some respects, these were the earliest versions of smart beta ETFs because many suggest that smart beta described any weighting methodology that is not weighted by market capitalization, meaning that the largest companies get the highest weighting in an index. Examples of equal weighting would be ticker RSP, the S&P 500 equal weight ETF which has outperformed SPY, the S&P 500 cap-weighted counterpart by about 65 basis points annually over the last 10 years. About 10 years ago the first smart beta or factor based ETFs emerged. They picked stock based on their fundamental attributes like return on equity or priced earnings multiples, or factors like momentum or low volatility as opposed to just company size. The goal of these strategies was to provide different exposures to the market, and hopefully to provide better returns or less risk. More recently, actively managed ETFs have been introduced and really they love to exploit market inefficiencies and produce alpha or out-performance. I've heard it described in another way that the evolution saying really that every valid investment strategy is really based on a relevant return driver. And that beta, smart beta and alpha are just terms to differentiate the level of public acceptance of the return driver or factor in respective order, so beta being sort of buy and hold, being the most widely exposed Smart beta referring to factors like value or momentum. They've been exposed but are not as widely employed or accepted in the public domain, and then finally alpha which is used to describe return drivers that are the least widely disseminated or accepted. And smart beta and active ETFs have been the fastest growing segment of the Canadian ETF market over the last few years, albeit from a fairly low starting value. 


Market capitalization weighted ETFs make up the largest part by far of the Canadian ETF market in Canada and globally. They are a great way to access the performance of the total market as total return of the index mirrors the change in the total market value of all stocks. They're also relevant because the largest companies have the largest shareholder basis. They tend to be the least expensive ETFs and are very tax efficient as they have very low turnover. That being said, there are potential dangers of investing in market cap-weighted indexes. Market capitalization weighted indexes tend to be backward looking. The shape of the index is driven by past successes, and some examples are shown here. On the left, at the height of the tech bubble in September 2000, Nortel made up more than one-third of the TSX Composite Index and have a market cap of almost 400 billion. And as we know its share price went from $124 to under a dollar leading to bankruptcy and a dramatic drop for TSX Composite. Similarly RIM or BlackBerry now share price rose to almost $150 a share in June of 2008, and RIM was briefly the most valuable company on the TSX and have market cap of almost 80 billion. Three years later, it had dropped more than 80% and now has a market cap of about 8 billion, it's rallied actually a bit lately. I think more fresh in investors' memories might be Valeant Pharmaceuticals. On the right it reached a peak of 115 billion in market cap in summer 2015, and had been singularly responsible for most of the TSX's gains over the previous couple of years at that point. It was the most valuable company in the index and have market cap exceeding that of Royal Bank. Then came the news about price gouging by pharmaceutical companies in the US and potential fraud at Valeant and the stock fell from a high of almost $350 a share. And now it trades under $18 with a market cap of about $6 billion, so we see a loss in market cap of almost 95%. We'll see how that plays out. 


This slide demonstrates how thinking has evolved in the evaluation of investment management. In the '70s, the return of the portfolio was pretty much viewed entirely as attributable to a manager's skill or alpha. And in the middle in the '80s, the view was, there was a significant chunk of portfolios return attributable to just being in the market or beta, while alpha was the portion of the return earned or lost by investing actively. And now alpha is viewed as a much smaller component of total return with the bulk of the returns being generated by other types of markets factors or beta factors. And factors are really just characteristics or variables that drive asset prices, and there are a number of different factors that have been identified, that have been academically and empirically proven to provide enhanced risk adjusted performance like value, quality, low volatility, and momentum. Describe one of these in a bit more detail. Momentum is just really the tendency for stocks that have done well recently to continue to do well and vice versa, so stocks that have done poorly to continue to do poorly. And as far as the rationale, there's been many explanations as to why this exists but the most logical appear to be behavioral in nature which we're never going to be able to correct. Investors tend to initially underreact and then overreact to new information and this allows stocks to rise beyond fair value. Over the last 15 years, beta has been subdivided into regional, country, and sector, and one of the most interesting developments has been the attribution of 50% plus of traditional alpha return to factor or smart beta. There was a study conducted by MSCI who's an index provider, big index provider in 2015, they looked at US money managers and in that study they concluded that about 80% of active managers alpha was in fact smart beta or factor beta. In fact, a good portion of Warren Buffet's returns widely thought as the greatest investor of all time. His returns over the years have been in hindsight attributable to his exposure to the value factor. Not to take anything away from him since he figured it out before anyone else. But if you look at his returns over the past 15 years or so since more investors started paying attention to these factors, he hasn't fared quite as well. 


So factor-based strategies or smart beta combine the benefits of active and passive management. And the diagram on the bottom left shows where these strategies fit in. Representing the blue center circle or the sweet spot if you will between active management on the right and market capitalization weighted return indexes on the left in gray. So smart beta takes the low cost, transparent strengths of market returns, and then couples them with the best tools that are available to active managers in a scientific, rules based approach. And the illustration on the right of the slide, you can see where smart beta strategy rests between market returns and cap-weighted returns, and on the right active management. There have been many factors identified over the years and I've mentioned some of them briefly. However, those that are shown in the middle here are those factors that have been most consistent in terms of having an impact over a long time periods of value, company size, yield or dividend focused, quality, volatility, and momentum. Factor-based ETFs can be very valuable building blocks in portfolio construction because they're not subject to style drift or geographic drift. So the Canadian value ETF for example will only have Canadian companies that exhibit value characteristics. In contrast to an active Canadian equity fund which may drift away from a value strategy, may also have up to 30% exposure in US stocks and then potentially have the currency hedged or unhedged. And smart beta can be used as a core strategy or as a compliment to active and passive strategies. In fact, in Canada factor strategies may make even more sense as core positions given the makeup of the TSX Composite. As we've already discussed past issues with single name risk in the index, so Nortel and Valeant that we cited. Currently the top 10 names in the TSX Composite make up almost 40% of the index. And the financials and energy sectors comprise about 55% of that index. So this makes the index very vulnerable to, for example, a housing correction or volatile energy prices. So moving away from cap-weighted strategies here should increase the diversification benefits. Another value for smart beta is that these stocks, these indexes provide a buy and sell discipline for the owner. So stocks are added or removed from these ETFs based on how their fundamentals change and it's rule based. There's no human oversight. So their portfolios adapt to changing market conditions by changing the constituents. 


So here we compare how passive ETFs differ from active and factor-based ETFs. So passive ETFs are typically market capitalization weighted, and they're not tactically managed. Investors will and then should be comfortable to own all the stocks in the reference index. And it's again a simple and inexpensive way to get market exposure. Active and factor ETFs potentially provide a way to get better risk-adjusted returns by exposing the portfolio to proven market premiums like those we've discussed previously, value or momentum. These ETFs may appeal to investors who are looking for discipline management and stock selection from best in class managers. And active management may tactically over or underweight sectors to take on currency exposure or increase exposure to cash to reflect their outlook on the markets. 

[Diversifying Factor Exposure]

As we discussed on recent slides, investing in smart beta factors like value, momentum or low volatility may lead to better risk-adjusted performance. However, these factor exposures may underperform and occasionally for long periods of time. So this chart shows the historical performance of our various factor-based smart beta indexes dating back to 2003. So momentum is in dark blue, value in turquoise, low volatility or risk weighted in light blue, dividend in yellow, and then core which is a blend of all these strategies in orange. And then finally the TSX Composite benchmark returns are in purple. Unlike the returns of different sub sectors in the market, factor returns are not consistent, and therefore diversifying a portfolio using multiple factors may also improve risk-adjusted outcomes. As you can see moving portfolios away from strictly market capitalization generally improve performance with the TSX benchmark having the lowest returns in 6 of the 13 years considered. The Canadian momentum strategy has the best returns in six periods while value is the top performer in five periods. The core represented by the orange is a combination of the four factors and as might be expected ends up with less variable performance, but it's consistently better than market capitalization weighting. So this slide makes the case that diversifying exposures across multiple factors can improve outcomes. 


Actively managed ETFs are relatively recent phenomenon in Canada, but again as I mentioned are growing pretty significantly. So not too dissimilar to mutual funds that are run by managers that make decisions over selection of securities to buy and sell as well thorough research and due diligence. These also seek to really to have the most optimal timing of their transactions. And the best performers usually deviate from the benchmark and have high active share. So active share is really a reflection of how differentiated a fund is from its benchmark index. So an active share of Canadian equity fund that is completely different than the TSX Composite would have an active share of 100%. And a closet index mutual fund or one that pretty closely hugs the TSX Composite in Canada would have an active share in the 40% range, meaning only 40% of its holdings are different than the index. And then similar to actively managed mutual funds, active ETFs seek to generate alpha or out-performance. They have flexibility to adapt to changing market conditions, move to cash or over or underweight sectors or countries. They can potentially generate excess returns when markets move sideways by tactically allocating to cash or bonds or to seek better risk-adjusted returns. Investor should demand superior total return if risk is greater or lower volatility and or less correlation to the broad market. And the measures of risk-adjusted return include standard deviation with lower being better, Sharpe ratios which consider how much return a fund takes per unit of risk, as well as up and down capture ratios which look at degree to which funds participate in capturing returns of the markets, when the market is going up versus when it's retreating. 


So our company First Asset offers a comprehensive suite of ETF solutions as we discussed earlier. We've been a leader in the fastest growing segment of Canadian ETF market, smart beta and active ETFs, we also offer a broad suite of traditional active ETFs specializing in specialized asset classes like REITs and preferred shares, cover call writing ETFs that provide tax-advantaged income, and lower the overall volatility of portfolios. Multi-factor ETFs that combine factors like low volatility and dividend income as well as specialized and actively managed fixed-income ETFs, and corporate class ETFs that offer tax-differed growth. 

[Thank You]

So that concludes the formal part of my presentation. And if you have any questions at this time, I'm happy to address them. And again, thank you very much for taking the time out of your day today. 

[Q & A]

Thank you, Dave, that was a very informative presentation. We encourage questions from the audience. So if you have them ready, you can type them into the Q and A panel. Again, it's located on the right hand side of your screen. While we wait for the questions to come in, I would like to point out that CIBC Investor's Edge clients have access to the ETF Center on our website. You will find this after logging into your Investor's Edge account, then clicking on quotes and research, and below that you will see the ETF Center link. In the ETF Center we have great research tools available such as screener to help you look for ETFs and a compare tool to directly compare four ETFs side by side. In addition, there are resources such as analyst's reports and education center with lots of videos. Now back to the Q and A, it looks like we are receiving lots of questions. And looks like we have received a couple of questions regarding, do ETFs only have exposure to large cap stocks? Yeah, that's an interesting question. I mean, as I think I touched on in the presentation, most ETFs or the bulk of ETF assets in Canada are in cap-weighted ETFs, whether it's Canadian equity or US equity or an international equity which means that more of the portfolio would be in large cap stocks. That being said as I also touched on the presentation, we've seen huge growth in the number of ETFs, I mean, providers and the number of products out there. So now there's pretty much products for every kind of way you want to slice and dice the market and there are ETFs for small-cap stocks or mid-cap stocks, so there's ETFs for practically every exposure. So the answer is the bulk of the ETF assets are invested in large-cap stocks just because most of them are invested in cap-weighted ETFs. However, investors do have a huge amount of choice on the Canadian ETF landscape. Thank you for answering that, Dave. So we have another question from Rick. Are bid-ask spreads large in ETFs? Again, I touched on it in the presentation, and so really the extent of the bid-ask spread is a function of the basket of securities in the ETF. So, for example, if you're looking at buying a small-cap ETF, typically small-cap stocks are not as liquid as large-cap stocks, and so a portfolio of small-cap stocks is going to have larger bid-ask spreads in each of the constituents. Therefore, the bid-ask spread of the ETF is going to be larger. And then for larger-cap ETFs or cap-weighted ETFs typically bid-ask spreads are, you know, pretty tight in one set spreads. That answers the question. Thanks, Dave. That was a good question as well. Next one, we have one from Adrian. Are ETFs as safe as owning equities directly? Interesting question. I mean, I think one of the great things about ETFs is that with one single ticket, you typically get exposure to a wide basket and a widely diversified basket of stocks. So I think the answer is yes, and that if you own a single stock, obviously, you have significant risk that that stock could be impacted by market effects or internal or so, whereas an ETF owning a basket of securities has, even if it owned that security is not going to be nearly as impacted. And most ETFs would at a minimum have sort of 25 to 30 stocks in a portfolio or assets in a portfolio. So most researchers indicated that to get a good well diversified portfolio, you need sort of 20 to 30 stocks. So the answer is, yes, ETFs are typically going to give you or going to be less risky than investing in single stock. Thank you again, Dave. Another question we have is from Amir. And Amir is asking, "Can you please advise as to how one actually differentiates between active and other kinds of ETFs such as simple beta? And how does one know which ETF is actively managed and which one is not?" Yeah, I mean, again most of the ETFs, the biggest ETFs are just simple cap-weighted strategy. So they are passive and the only way to change constituents is when the index provider changes the constituents. So the TSX Composite has a committee that pulls on stocks that should be in or out of the index, and only then will the constituents change in that index. So that is a passive strategy, as far as how you can identify active strategies, typically the active would be in the title of the ETF if it's an active strategy. And then smart beta, I think would be considered an active strategy as well given that... It's rules-based, however, the constituents are changed actually relatively frequently depending on the type of ETF you buy. And again the title should provide some guidance on that. And I think most of the providers would differentiate if you go to a provider's website or if you're on CIBC, on their ETF Center, they'll give you a description of the ETF and it should provide you with some pretty good information as to whether funds are active, or active or passive. Thank you for sending that question, Amir. It looks like we have one question that's related to this one from Michael, who would like to know how do we tell which categories such as momentum value of particular ETF falls in so for these two categories. Yeah, I mean, again for the most part I think the title of the ETF would provide that information. For example, not to toot my own horn or to promote First Asset but our value and momentum ETFs say value or momentum in the title of the ETF. So it should be fairly simple to ascertain what strategy they're executing, and then for the most part I think you'll be able to figure out or most of the providers are very transparent in how these indexes are constructed, and how funds or securities are chosen for the strategies. Thank you again, Dave. We have another question from April, who would like to know, what are the fees involved in trading ETFs with Investor's Edge? And are there any additional management fees involved? To be honest with you, I'm not familiar with Investor's Edge. - I think it's $6.95 the trade. - Right. Yeah, so we have $6.95 commission flat rate and for active traders we have $4.95 as well. - Yeah. - Okay. Great. So, yeah, and then the only other cost really is the bid-ask spread of the ETF to be fully transparent and typically that's going to be, you know, a penny or two depending on the ETF. So, you know, it's very, very small in terms of the cost. Thank you, Dave. I just want to say we will try to get through as many questions as possible. So the next question we have is from Jim, who would like to know what happens when an ETF shuts down? Yeah, that's a good question. And I think one that in many cases people are a bit too fearful of especially with more and more ETFs getting in the markets, inevitable that some are going to be forced to close their doors. It costs money to run an ETF and after a certain point it becomes too expensive for an issuer to keep the product open. But an ETF closing isn't a cause for panic, you'll have an opportunity there to sell you shares prior to it getting delisted or to receive your share of the cash proceeds, that might not be optimal because the sale may trigger some tax liabilities. And there are costs with redeploying that capital but overall closing the ETF isn't really a big deal. Thank you, Dave. That was actually an interesting question. The next one we have from Robert, who's asking, the talk covered Canadian market investments, "What if I need to diversify outside of Canada in ETFs? Yeah, I mean, as I mentioned there's now I think 530 ETFs in Canada, and they cover everything practically that you can imagine, and maybe some of you may even seen it there was actually a marijuana ETF that was launched not so long ago that deals in marijuana stocks. So there's practically every flavour of ETF that you can imagine. And if you want to buy international stocks, you can buy international stocks, you can buy US stocks, you can buy emerging market stocks, you can buy emerging market bonds. So, yes, I think that's one of the beauties of ETFs is it gives you an ability in one trade to get a very, very diversified portfolio that would have been very challenging to do in the past, especially for do it yourself investor. Thank you. So we have another question from Edmonds, if you have any information on inverse ETFs? Well, that's really a leveraged ETF. And so I'm not an expert on leveraged ETFs because our company does not provide them. However, and certainly it's been a fair bit of... When ETFs are been criticized or often people have used leveraged ETFs as the poster child for criticizing ETFs. Because they can be risky and certainly the outcome from owning an inverse or a leveraged ETF may not necessarily mimic the performance of the underlying, for example, if you own a leveraged gold ETF and gold doubles over a year period, you may not see, you know, four times return on the investment and that's because really these products are designed for short term investors. Really even a day because it's all about the reset frequency of the product, and most of these leveraged funds reset daily and that means funds only designed to provide leveraged or inverse exposure for one training session, not over a long period of time. So the longer one holds these leveraged ETFs or inverse ETFs, the less likely that they're going to get sort of linear gains or losses, especially if the returns are volatile. And maybe just provide a better sort of quick understanding if you think about a volatile asset that goes up 25% in one day and then it goes down 20%, the next day you're back to flat. So therefore a perfectly double levered ETF would go up 50% on the first day because it went up 25% otherwise, and then on the second day moved down 40% because the asset went down 20%. And then on the close of the second day, the underlying asset would actually be back to its initial price, but the double levered ETF would actually lose 10% of its value. So that's the issue with leveraged ETFs, and you just have to know what you're buying when you buy them and accept that you may not get the return of the underlying perfectly, and the longer you hold them the less closely that's going to be mimicked. Thank you, Dave. We have time for one more question and we see that a couple of questions about this. Are management fees and trading costs factored into returns that are posted by ETFs? Yes, they are. So, yeah, if you see... If any ETF provider post returns of an ETF on their website, those would include management fees and trading costs. So, yeah, they're always net of fees. Thanks again, Dave. It looks like that's all the time we have. Dave, I'm sure I speak on behalf of all the audience that I thoroughly enjoyed listening to your insights. So thank you again for a great presentation. And thanks to all of you for taking the time today. A reminder to the audience that if you wish to listen to this webinar again, a link will be emailed to anyone that registered or you may visit CIBC Investor's Edge website. I would like to thank the audience, we really appreciate you being here. Should you have any questions or comments, please visit Investor's Edge website or get in touch with us by phone, chat or email. Thank you again for joining us today, we will see you next time.