Competition In Canada

September 11, 2006

Claymore Advisors injects some much-needed competition into the Canadian ETF market with the launch three new funds.

Somebody needs to save Canadian investors from themselves; it might as well be Claymore Advisors.

Claymore expanded its footprint in the Canadian ETF industry, launching three new ETFs onto the Toronto Stock Exchange (TSX) and filing for three additional funds. The ETFs join the existing Claymore Fundamental Index ETF (TSX: CRQ). 

The new products focus primarily on fundamentally weighted indexes, and are supposed to serve as an alternative to Canada's absurdly priced mutual funds.  As covered here, Canadian investors pay more for their funds than investors in any other market on earth: an average of a stunning 2.8 percent.  Claymore, which will charge 60-65 basis points for its new funds, hopes to change all that.

The new funds are:

  • BRIC (TSX: CBQ) -- tracking the Bank of New York BRIC (Brazil, Russia, India and China) ADR Index.
  • CDN Dividend and Income Achievers (TSX: CDZ) - tracking a Mergent index focused on Canadian companies that have a sustained history of paying high and growing dividends.
  • U.S. Fundamental Index (TSX: CLU) - tracking a currency-hedged version of Rob Arnott's FTSE RAFI US 1000 Index, a fundamentally weighted large cap index.The new funds join the existing Canadian Fundamental Index ETF (TSX: CRQ).

Three additional funds in the works are:

  • Global Fundamental Index
  • Japan Fundamental Index
  • Oil Sands

The move by Claymore to embrace the RAFI fundamental indexing methodology is interesting. In the U.S., PowerShares holds the ETF license for the RAFI indexes, and so far delivered only U.S. focused funds to investors.  When and where are the international RAFI funds in the States? 

The oil sands play is a distinctly Canadian product, focused on the unusual deep oil sands plays that are so popular with Canadian investors. These plays depend on a high price of oil to be economically feasible - oil sands are among the most costly sources of oil - so this fund will either make - or break - with the fluctuation in the price of crude.

The new ETFs will compete not only against the expensive mutual fund competition, but also against the iShares Canadian ETFs from Barclays Global Investors (BGI).  BGI has had the Canadian ETF marketplace to itself recently, after both Toronto Dominion and State Street abandoned their ETF franchises in Canada over the past few years. Until Claymore launched its first fund earlier this summer, BGI had a monopoly on the space.

Claymore hopes to have more luck than previous competitors in part by paying financial advisors to sell their products. In addition to the core expense ratio, Claymore will pay advisors a 10 basis point "trailer fee" to compensate them for selling special "advisor shares."  ETF designers in the U.S. - and particularly PowerShares - have batted around the idea of using either loads or extra fees for advisor-compensated shares , but in the end, they have all shied away from the ideaservice. Claymore could conceivably introduce the idea in the U.S., where it has filed for the right to launch four funds, and is trying to convert two existing closed-end funds to an ETF structure.  It's unlikely, however: Trailer fees are common in Canada, and there is no signof them in Claymore's U.S. ETF filings

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