Carrick Talks Money

“Most people should have a core holding in traditional market-cap weighted benchmarks. They give you your exposure to the market,” said Pat Chiefalo, managing director and head of product for iShares Canada. “But there’s nothing wrong with adding on different flavours.”

In that respect, the U.S. market has a sizable lead. While ETF growth has been strong in Canada in recent years, topping the $70-billion mark in assets under management by June, ETF assets in the United States are expected to reach the $2-trillion level early next year.

The sheer size of the U.S. market has engendered the introduction of a slew of offbeat, niche ETFs to serve investors.

ETFs claim only about 6 per cent of the Canadian market, with the overwhelming majority of investors preferring the $1.1-trillion mutual fund space. (ETFs in the U.S. have a 13-per-cent share.)

“It seems like we are less sensitive to the level of fees in mutual funds relative to ETFs than the U.S. is,” Mr. Chiefalo said.

But expected changes to regulations requiring additional disclosure of mutual fund fees in Canada could help tilt investors in favour of lower-cost ETFs, adding to the increasing pace of adoption of ETFs in Canada, he said.

ETF proliferation in Canada is spawning new funds targeting increasingly specific market segments, regions of the world or investing themes.

On Tuesday, for example, INK Research launched its Canadian Insider Index, giving exposure to those TSX-listed stocks with the highest levels of corporate insider buying and ownership. Horizons has filed a preliminary prospectus for a fund designed to track the index.

However, investors should be cautious regarding new, specialized Canadian-listed ETFs, said David Cockfield, managing director and portfolio manager at Northland Wealth Management.

“The Canadian market in many cases does not have enough securities in a particular sector to provide proper diversification to justify the additional fee cost of the ETF,” he said. “Simply buying the most heavily weighted or most favoured stocks in the ETF would be more efficient.”

Further, newly listed products lack the trading history to assess past performance under various market conditions, Mr. Cockfield said.

For investors looking for ETFs to provide exposure to a specific theme, The Globe and Mail compiled a list of products introduced to the market this year with the help of Morningstar ETF strategist John Gabriel. Investors should not consider this a list of investment recommendations.

Vanguard FTSE All World Ex Canada ETF (VXC)

For investors looking for near-universal exposure, this fund invests in mid and large-cap stocks from emerging and developed markets around the world, everywhere except Canada.

BMO Equity Linked Corporate Bond ETF (ZEL)

In what Bank of Montreal calls the first of its kind, this ETF takes the coupon payments from a portfolio of corporate bonds and uses them to buy equity call options. It combines fixed-income exposure with stock market upside potential.

Horizons Canadian Midstream Oil & Gas Index ETF (HOG)

This fund forgoes the extraction and refinement businesses to focus on the transportation and servicing of the energy sector, such as pipelines. It’s Canada’s first midstream energy ETF, according to Horizons.

First Asset Hamilton Capital European Bank ETF (FHB)

The first Canadian ETF to focus on European bank stocks, this fund is a play on a recovery of the financial sector from the sovereign debt crisis.

Horizons Canadian Select Universe Bond ETF (HBB)

To try to lower the tax burden on interest income, this ETF uses what’s called a total-return swap structure – an agreement with National Bank of Canada to provide a return linked to the benchmark the fund is tracking.

Purpose Best Ideas Fund ETF (PBI) In the same spirit as a number of U.S.-based ETFs tracking the habits of investing gurus, this fund seeks to replicate the success of 20 of the world’s top investment managers, including Warren Buffett, George Soros and Carl Icahn.