Canada is known globally for many things, including its stable financial services sector, wealth of natural resources, highly-educated and skilled workforce, and status as one of the few remaining triple-A rated nations.
Canada is also a hotbed of innovation—not only in the technology space, where it continues to attract global talent but also in the area of financial services. Canada was, in fact, the birthplace of the global exchange-traded fund (ETF) industry, with the world’s first ETF created in Canada in 1990—three years before the US followed suit.
The Canadian market is driving forward with another innovation: platform traded funds or PTFs. PTFs are another Canadian first: a fund distribution channel that trades at end-of-day net asset values, simplifying fund transaction and administrative processes and enabling cost and efficiency benefits to asset managers, dealers and investors. As investors scrutinise and contrast multiple investment opportunities with a close eye on transaction and management costs, PTFs can offer new opportunities for fund sponsors to drive efficiency and compete more effectively for inflows. The first Canadian PTF sponsor was Invesco Canada, now joined by others including Stone Asset Management and Ninepoint Partners.
As in many other markets, and particularly in the persistent low-rate environment, investors in Canada have focused much more closely on the expense and cost side of their holdings—a trend encompassing the spectrum from sophisticated institutional investors to cost-conscious millennials. Many individual investors continue to open fee-based accounts, paying per transaction rather than having costs included in a higher expense ratio within their fund management fee. Further compounding the fee and expense demands, fund sponsors are under increasing pressure from their own boards and owners to deliver a return. Investment fund sponsors and their suppliers continue to work hard to keep pace, introducing new technologies, processes and instruments to deliver results and capture inflows.
Canadian investors are taking notice, with one key beneficiary being ETFs. While the Canadian market remains small relative to global behemoths, ETFs continue to gain ground in Canada. Canada’s 729 ETFs saw inflows of approximately $437 million in September—a slowdown after an even stronger August—bringing total assets to approximately $188 billion. ETFs offer efficiency and cost benefits, as well as intraday pricing and liquidity, and continue to represent a popular and powerful tool for investors. Notably, Canada has also seen a proliferation in actively-managed ETFs, further reinforcing the role ETFs can play in helping investors access their desired investment vehicles. According to a recent survey by PwC, Canadian ETF industry assets are expected to surpass approximately $400 billion by 2023.
For many investors, particularly those focused on long-term investment goals such as saving for retirement, intraday pricing and intraday liquidity may not be a driving factor—particularly relative to factors such as consistent, transparent pricing and, of course, a focus on transaction and management fees.
Enter PTFs, which are designed to enable efficient and lower-cost transactions. PTFs are typically a class or series of an existing investment fund that investors can buy or sell at an end-of-day net asset value (NAV) per share/unit. CIBC Mellon collaborated with NEO, a Canadian exchange, and other industry players to create the first platform-traded fund process, using NEO Connect, a Canadian platform that streamlines the distribution of financial assets to investors.
PTFs share attributes of both exchange-traded funds and traditional mutual funds. Like exchange-traded funds, the trade execution for a PTF occurs at an exchange, however, ETFs can be purchased or sold at market value throughout the day. PTFs are similar to the traditional mutual fund transaction process as they are applied a NAV at the end of each business day, however, in Canada, mutual funds are not traded on an exchange but rather through third-party trading vehicles.
Structuring a platform-traded fund
PTFs trade at the net asset value (NAV) per share/unit through a market and are designed for investors with fee-based accounts who are seeking low-cost, managed portfolios. In the PTF structure, the asset servicing provider acts as a clearing and settlement agent, leveraging connectivity with the exchange to enable investment fund providers to create platform-traded classes of their funds.
Typical fund managers tapping into PTFs in Canada include mutual fund providers, ETF sponsors, and “liquid alternative” fund sponsors Liquid alternative funds provide investors with exposure to alternative strategies without a large minimum commitment, enabling retail and institutional investors to diversify their portfolios and access new investment opportunities which have not been available outside traditional hedge fund structures.
The PTF structure depends on the participation of a number of stakeholders, including fund sponsors and managers, a central depository, clearing agent, settlement agent, transfer agent, custodian, valuation agent, financial information providers and others.
Key innovation and value-add from CIBC Mellon was building direct connectivity with Canadian exchanges as well as being able to act across multiple roles, including custodian, clearing agent, settlement agent and valuation agent—enabling further streamlining of the process for fund managers looking to launch a PTF.
Dealer and advisor benefits
Trading at NAV brings a number of benefits for PTF providers and investors—not only eliminating the administration associated with delivering unique pricing for each transaction, but also eliminating bid-ask spreads which have the potential to impact returns for investors, particularly among lower-volume instruments.
The streamlined solution also means reduced administration, as there is no intra-day liquidity and no in-kind subscriptions or redemptions. Reducing these administrative requirements and implementing a more efficient trade settlement process can lead to the lower managed expense ratio (MER) compared to other fund classes and transaction types.
For dealers of investment funds and for investment advisors—a crucial audience for any fund manufacturer—the PTF structure also offers other upsides. Dealers and their advisors are able to trade in bulk, which allows them to place PTF purchase and redemption orders across multiple client-accounts simultaneously using their existing trading platform.
Dealers have fewer accounts and fewer trades to manage and are able to simply allocate fund units from a single end-of-day trade across their client base. This reduces the administration efforts for dealers and advisors—potentially freeing them up to focus on client services. Dealers and their advisors can be well-positioned with investors, not only pointing to efficiency and cost advantages but also delivering transparency around pricing. The simplified PTF process can help eliminate risks as well—not only the administration risks associated with greater complexity but also risks related to potential communication errors between counterparties. PTFs also enable funds, dealers and advisors with consistent and transparent pricing, as the same fees are applied to all transactions, regardless of size.
PTF growth continues
The Canadian market continues to see appetite for an array of new instruments in the hunt for compelling offerings that generate inflows from investors. PTFs have gained ground, and today, Canada has more than 70 PTF tickers on offer from nine providers and has raised nearly approximately $1 billion. As the hunt for efficiency continues, PTFs represent one more tool in the arsenal of fund sponsors and dealers looking to connect with ever-more-demanding investors. For asset servicing providers like CIBC Mellon, the rise of PTFs is only the latest in a long road to drive efficiency and enable clients as they move their businesses forward.
For Canada, this is just one more positive step forward for our innovative financial services industry.
