ETFs should be available from fund dealers
Itīs strange but true: Thereare mutual funds that mutual fund dealers arenīt allowed to sell. The productsthat are off-limits to them are exchange-traded funds.
ETFs, most of which charge lowfees and track indexes, fall within the definition of mutual funds under securitieslegislation. And while there are some minor differences in how ETFs andtraditional mutual funds are regulated, these differences are narrowing.
For instance, starting thisfall, we can expect to see ETF managers allowed to distribute Fund Facts, ashort mutual-fund disclosure document, instead of the much longer prospectusthatīs currently required.
ETFs are available from anyfull-service or discount broker who can place orders on stock exchanges. Funddealers donīt have this access.
According to industry sources,securities regulators wouldnīt object to opening up ETF sales to fund dealers,provided that proficiency requirements were met and access issues could beresolved. To qualify, dealers might have to pass an ETF course, or else theCanadian Securities Course taken by brokers.
Consumer advocates favourallowing fund dealers to sell ETFs. So, not surprisingly, does the ETFindustry. And so do many fund dealers.
Pat Dunwoody, executivedirector of the Canadian ETF Association, says the trade group has drawn up alist of potential hurdles to ETFs being available through fund dealers. "Weīrejust going through them one at a time to see if they can be eliminated," shesays.
One hurdle to overcome isgetting ETFs placed on dealersī back-office platforms so they can execute buyand sell orders. To this end, preliminary discussions have been taking placewith service providers, says Sandra Kegie, executive director of the Federationof Mutual Fund Dealers.
The Toronto Stock Exchange,which would benefit from greater trading activity if ETFs were more widelyavailable, has also been involved in talks aimed at opening up ETF trading tofund dealers. The TSX is an affiliated member of the ETF association.
Another potential hurdle isacceptance by the fund dealers themselves. Mutual funds typically paycommissioned fund dealers to sell their products, while the vast majority ofETFs donīt. Fee-based dealers, who charge clients directly for their services,remain a minority.
But according to the dealerassociationīs Kegie, thereīs widespread dealer support for access to ETFs.Currently, dealers can obtain ETF exposure for their clients only indirectly,through mutual funds that hold ETFs as their underlying assets.
Kegie cited a recent survey offund dealers, the Association of Canadian ComplianceProfessionals and the Independent Financial Brokers of Canada(representing both mutual fund and insurance licensees). Of the more than 300respondents, said Kegie, 80 per cent expressed interest in selling ETFs and 80per cent would be willing to take an ETF-specific course.
Canadaīs largest provider ofETFs, BlackRock Asset Management Canada Ltd. which manages the iShares family,says it would welcome any regulatory initiatives to allow mutual fund dealersto sell ETFs.
"We believe this would notonly greatly increase the universe of available investment products, but wouldalso provide all investors with a wider menu of purchase options," BlackRockCanada CEO Noel Archard said in a submission in April to the CanadianSecurities Administrators (CSA).
Archard was among the fundindustry executives who commented on the CSAīs discussion paper on fund fees.He said thereīs no need for regulators to require creation of low-fee classesof funds, since these already exist in the form of ETFs.
Fund-dealer access to the$60-billion ETF market and its roughly 275 TSX listings in Canada isnīt goingto happen any time soon. It will take time to clear the various regulatory andlogistical hurdles.
However long it takes, theeffort will be worthwhile. Once mutual fund dealers can sell ETFs, theirclients will gain access to more investment choices and lower fees. Itīs anidea whose time has come.