In September 2017, institutional investors gathered at the Toronto Region Board of Trade to hear insights on the ETF industry in Canada.

Daniel Straus, analyst, ETFs and financial products, with National Bank, kicked things off with a presentation on the evolution of the ETF market in Canada. “There is now an ETF for every category, every asset class under the sun,” Straus said. This plethora of choice coincides with double-digit annual asset growth and new providers entering the market. Despite this apparent growth in competition, however, the industry in Canada is still very top-heavy. While there are currently 24 ETF providers in Canada (a figure that will likely have increased by the time of publication), only eight have assets over $1 billion and just 33 ETFs represent 50 per cent of the market share. Looking ahead, Straus suggested that ETF growth will continue, especially in actively managed and thematic ETFs like Horizons’ marijuana ETF, launched in April 2017. The growth of active ETFs in Canada is expected to be greater than in the U.S. because disclosure requirements aren’t as onerous.

Straus was followed by a group of three speakers—Andres Rincon, director, ETF and options research, with TD Securities; Aly Somani, senior analyst, portfolio management, with Sun Life Global Investments; and Ron Hochman, head of institutional equity derivative sales with MX—who discussed how ETF options can be used in portfolios. The main uses of ETF options, they said, are to provide downside protection (via buying put options) and to enhance yield (via covered calls and selling puts). The panellists advised investors to monitor the sensitivity of the option to the underlying exposure, avoid the risk of needing to unwind the option at an unattractive time, understand the liquidity of their holdings, and make sure they understand how the option is priced. Looking ahead, all three expect to see more ETF options used for fixed income (to take positions on rates and credit spreads), as well as using options on preferred share ETFs within structured products.

The next session saw Dave Nadig, CEO of ETF.com, work to dispell some ETF myths. The first one? Illiquidity. Nadig suggested that asset managers— and not trading desks—are actually creating liquidity, pointing out that most ETF spreads actually trade below the underlying index.

Another myth Nadig discussed is horizontal shareholding—the belief that firms owned by overlapping sets of investors have reduced incentives to compete. In the case of ETFs, this myth relates to index investing and the increased demand for shares with the largest market cap. Nadig challenged the conclusion of a recent research paper—“The Anti-competitive Effects of Common Ownership,” published in 2017 in the Journal of Finance—that suggests horizontal shareholding exists. He reminded attendees that correlation doesn’t mean causation and that passive managers often support activist shareholders through their voting and engagement activity.

Finally, Nadig disputed the myth that ETFs were becoming too big or were being traded too much. He suggested that increased trading increases the price efficiency of underlying holdings, and could actually help to solve liquidity problems.

Next, Jonathan Sylvestere, head, business strategy, equities trading, with TMX Group, provided an overview of the ETF market structure. He suggested that the market was becoming more resilient because of the increased stability and volumes.

The final panel—with contributions from Craig Lazzara, managing director and global head of index investment strategy with S&P Dow Jones Indices; Dave Underwood, former assistant chief investment officer with the Arizona State Retirement System; and Vijay Vaidyanathan, CEO of Optimal Asset Management—focused on factor ETFs and pension usage. Factor investing is not new, the panellists said, but ETFs have made it easier for pension funds to implement a cost- effective factor investment strategy once they’ve decomposed their investment strategies into sources of alpha. However, the panel members acknowledged that there are still challenges in using factor ETFs: the numerous definitions used to measure well-known factors, the time required to educate stakeholders, and the need for investors to take a view on what causes the factor to behave as it does (and whether this view will persist over time).