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BlackRock’s iShares Sees ETF Market Doubling

IShares expects Canada’s exchange-traded fund market will double to about C$100 billion ($100.8 billion) in three to five years and the company plans to offer products and partnerships with firms such as Sun Life Financial Inc. to maintain its No. 1 rank.

IShares Canada, a unit of BlackRock Inc., the world’s largest asset manager, is planning to unveil at least one new product in 2013, said Mary Anne Wiley, managing director and head of the Toronto-based company. The strategy for 2013 will be producing “themed” ETFs as opposed to those defined by geography, she said.

“We don’t need another Canadian equity ETF,” Wiley said in an interview at Bloomberg’s Toronto office. “Where I see demand is in strategy-based, theme-based products, income and yields. That could be done by combining equity and fixed income rather than going after a particular segment.”

The ETF industry in Canada had total assets under management of about C$54 billion as of October, according to iShares. The industry has grown 20 percent to 30 percent a year over the past five years, Wiley said. The Toronto Stock Exchange says it offered the world’s first ETF in 1990, tied to the TSE 35 Index. ETFs trade on exchanges like a stock, offering investors exposure to a basket of equities, bonds or other assets.

“We could double that size in three to five years, easily,” she said in the Nov. 21 interview. “More and more investors are using ETFs as part of their core investing.”

ETF Industry

BlackRock Asset Management Canada Ltd. operates iShares Canada as part of New York-based BlackRock’s $12.5 billion 2009 purchase of Barclays Global Investors, which owned the iShares brand.

Assets under management grew 26 percent this year through October, with fixed-income products accounting for about 50 percent of net new funds, Wiley said.

IShares Canada says it holds a 76 percent share of the ETF market, or C$41.3 billion in assets under management. The company sells 88 ETFs, accounting for about a third of the 258 total ETFs available in Canada. The Top 10 largest ETFs belong to the iShares family.

“It’s still a small part of the pot, so we have a long way to go,” Wiley said.

Kevin Gopaul, chief investment officer with BMO Asset Management Inc., who runs the company’s ETF and mutual fund businesses, said iShares’ position as leader is not guaranteed.

“When you’re at the top, there’s nowhere to go but down,” he said. “A big firm like iShares may have difficulty competing in the more niche areas.”

Bank of Montreal, which is the second-largest ETF provider in Canada, has a goal of adding market share and “growing the pie,” Gopaul said, a sentiment echoed by Wiley.

“We are committed to growing, and growing the pie,” she said.

Sun Life Funds

A key development popularized in the U.S. that is “on the cusp of” becoming popular in Canada is fund managers using ETFs in their own portfolios, including in mutual funds, Wiley said.

In April 2011, Toronto-based Sun Life, Canada’s third-largest insurer by market value, partnered with BlackRock to launch two mutual fund products -- the Sun Life BlackRock Canadian Equity Fund and Sun Life BlackRock Canadian Balanced Fund -- whose portfolios are built using iShares ETFs. BlackRock serves as the subadvisor for the funds.

Sun Life fell 0.4 percent to C$26.57 in Toronto. It is the best-performing stock on the S&P/TSX Financials index this year, up 41 percent.

Canadian competitors including Bank of Montreal and Invesco Ltd.’s PowerShares have also launched mutual funds built on their own ETFs in recent years.

“This is a unique strategy for our firm,” said Sadiq Adatia, chief investment officer at Sun Life Global Investments Inc. in Toronto. “We wanted to give our clients the best of both worlds.”

Adviser Service

One of the reasons why Sun Life and BlackRock created the funds was to give more investors access to ETFs as many financial advisers in Canada are only licensed to sell mutual funds, Adatia said.

The products are also subject to higher management expense fees, or MERs, that come with mutual funds.

Rick Headrick, president of Sun Life Global Investments, said that while the ETFs are passive, deciding how much to buy and in what combination is active.

“There is an advice component,” he said.

In Canada, ETFs on average charge an MER of 0.4 percent, while mutual funds charge 1.9 percentage points higher on average, Wiley said.

“In a low-return environment like we are in, 2 percent makes a big difference,” she said.

Mutual funds have more assets under management, though growth is not as rapid. As of October, mutual fund assets under management totaled C$834.3 billion, up 7.8 percent compared with a year ago, according to data from the Investment Funds Institute of Canada.

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