Steve Hawkins has relied on one tried-and-true strategy to both ramp up the competition in the Canadian ETF space while poking at his rivals over the past nine years and on Monday, he turned back to it.
Hawkins, the CEO of Horizons ETFs, is offering a 45 per cent fee discount on three products that were created to mirror strategies made popular by his direct competitors in BMO and BlackRock — laddered Canadian preferred shares, equal-weight Canada REITs and equal-weight Canada banks. The move, along with another that made them tax-efficient for non-registered accounts, is a bid by Horizons to separate their products from the established pack.
“We’re not trying to create a fee war, we’re trying to provide products with rational fees to the Canadian marketplace,” said Hawkins.
Going forward, Horizons will only charge 30 basis points for the Horizons Laddered Canadian Preferred Share Index ETF, the Horizons Equal Weight Canada REIT Index ETF and the Horizons Equal Weight Canada Banks Index ETF. The same ETFs at BMO and BlackRock each come with management fees of 55 basis points.
Where the Horizons products are sorely lacking is in their assets under management. The largest fund of the three is the preferred shares ETF, which only has an AUM of $41 million. By comparison, BMO’s preferred shares ETF has $2 billion in assets and iShares’ has $1.3 billion.
Hawkins has faced this dilemma before with BlackRock’s iShares S&P TSX 60 Index ETF — the first ETF in the world. When the Horizons CEO wanted to introduce his own ETF mirroring the TSX 60 nine years ago, he was squaring off against a juggernaut that had $13 billion in AUM, he said. His solution then is the same as the one he’s taking now: offering the same strategy at a massive discount.
“This has been the way we’ve run our business for almost 10 years,” he said.
Horizons introduced its own ETF mirroring the TSX 60 when BlackRock had about $13 billion in the one product alone. And while BlackRock was charging investors 17 basis points, Hawkins said, he offered his ETF for seven and has since cut them to three. In the nine years since, BlackRock’s ETF has shed about $4 billion in AUM, Hawkins said, while Horizons’ has grown to $2 billion.
In the past, Horizons’ competitors have not responded with cuts of their own. And although ETF fees have declined in the past five years — the aggregate fee falling to 30 basis points from 35 basis points — there doesn’t appear to be a race to the bottom.
Zero-fee ETFs have already been introduced in the U.S., where two providers in SoFi and Salt Financial both released ETFs with either zero fees or in the latter’s case, negative fees, but they’ve drawn little attention.
But unlike in the U.S., Canadian providers don’t each have their own prime brokerages and aren’t able to manage operational costs in house.
“I don’t think that’s possible in the Canadian marketplace,” Hawkins said.
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