ETF

TSX

The Toronto Stock Exchange and ETFs: in general

Unlike mutual funds that you buy directly from the fund itself in what is called an over-the-counter or off-exchange transaction (also called a primary issue requiring delivery of a prospectus), ETFs are traded on the secondary or exchange market like shares of any other company.

In Canada ETF trading is the de facto monopoly of the Toronto Stock Exchange. ETFs have become an important source of revenue for TSX; see TSX 2008 presentation doc.1382 and TSX 2009 ETF sector doc.1383. ETFs at the end of 2008 accounted for 5% of all issues listed on the stock market, and 29% of new listings in 2008. Trading in ETF units on the stock exchange in 2008 were 400% higher than in the previous year: 6.27 million trades representing a total volume of $7.0 billion.

The TSX has excellent site for investors TMXMoney with a comprehensive section on ETFs. Much of the information in this section comes from this site.

ETF providers in Canada

There are 5 providers or promoters of ETFs traded on the TSX:

• iShares funds managed by Barclays Global Investors Canada Limited (whose parent company is being purchased by BlackRock, Inc. of the USA;
• Horizons BetaPro ETFs managed by BetaPro Management Inc.. (controlled by Jovian Capital corporation, and indirectly by a Calgary financier, Murray Edwards);
• various funds managed by Claymore Investments, Inc.. (a subsidiary of Claymore Group Inc. of the USA);
• the Power shares Invesco funds managed by Deutsche Bank of Germany; and
• exchange-traded funds offered by BMO Jones Heward investment counsel Inc.. (a subsidiary of Bank of Montreal).

ETFs traded on the TSX: by type

The TSX classifies ETFs listed on the exchange as follows:

Index tracking approach

ETFs that use an index tracking approach generally follow a pre-selected index, called a benchmark, and the return on the ETF will roughly correlate with that of the underlying index. Index ETFs follow a variety of indices, including the broad market (both Canadian and international), sectors such as energy, gold and mining, and specialty indices that cover such items as preferred shares and dividends. The weightings used in the underlying index could be based on market capitalization of the constituents or on fundamental factors such as financial criteria. Index ETFs may also follow indices that adhere to a certain investment style, such as value or growth.

Inverse approach

Inverse ETFs are designed to seek daily investment results that correspond to the inverse daily performance of their underlying index, offering investors a way to profit or protect during market declines or periods of volatility. Investing in these ETFs is similar to holding short positions, or using a combination of advanced investment strategies to profit from declining prices.

Leveraged approach

ETFs that use a leveraged approach create a fund based on an underlying index, and then employ leverage strategies in order to enhance the returns of the fund (as measured daily). Leveraged ETFs are designed to return a multiple of the return of a market index price on a daily basis. For example, to double the daily return, leveraged ETFs use a variety of derivatives such as futures contracts and index swaps. Often the ETF provider will borrow against stock in the fund to finance the derivative transactions thereby leveraging the fund to give it double the market exposure of the stocks in the fund.

Actively managed approach

Although ETFs are generally designed around a passive strategy with resulting lower management fees, some ETF providers offer an actively managed set of ETFs that operate more closely to the concept of a mutual fund. The ETFs have an active manager making investment decisions, often with the objective of outperforming rather than tracking a particular benchmark index, but usually with lower management fees than a traditional mutual fund.

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