CETFA executive director explains what worries him about a new SEC ruling, argues for government intervention
Eli Yufest sees a tsunami coming to hit Canada’s ETF industry. A recent ruling by the US SEC approved the launch of the first ETF share classes of US mutual funds not managed by Vanguard, which had held a patent on ETF share classes until 2023. Yufest, executive director of the Canadian ETF Association (CETFA) believes that the precedent could see 1,600 new ETFs launched on US markets as share classes of existing, and popular, mutual funds. Given Canadian investors’ existing ability to access US-listed ETFs, CETFA estimates that around 30 per cent of all Canadian ETF investments go to US-listed product, Yufest is ringing alarm bells.
Yufest argues that this flood of new products onto US markets could entice more Canadian investors to seek US strategies. While admittedly an advocate for the Canadian ETF business, which may lose assets under this new arrangement, he argues that end investors and advisors should care as well, as they may have less recourse and protection when engaging with US product. He has called for changes to Canada’s tax structures and incentives to prevent more Canadian assets moving stateside.
“It’s a major threat because there are very, very substantial mutual funds that could be very attractive to Canadian investors that they would have never had access to. And now with the ETF series, they're going to be able to gain access to it,” Yufest says. “When that happens, no one in the Canadian ecosystem benefits from that. So, no government revenue, no fund manager revenue, no custodian, no capital markets, no auditor, lawyer, potentially not even advisors.”
So far only one US firm has been approved to launch ETF series of its mutual funds, Dimensional Fund Advisors. Dimensional currently maintains a Canadian arm of its business with ETFs traded on Canadian exchanges. Yufest notes, though, that over 80 US mutual providers have now applied to the SEC to launch ETF share classes, which could see more products made available to Canadians that don’t have locally-listed equivalents. He argues that their existing size and scale may allow for better competition on cost, which could challenge Canadian ETF manufacturers.
Competition is a feature of capitalism, though, and investors’ ability to freely allocate capital to investments and assets around the world has helped with the accumulation of significant wealth in recent decades. Yufest doesn’t dispute that part of the system, but he argues that Canadian ETF providers are not able to play on even ground against their US counterparts. Because Canada charges sales taxes on ETF management fees, Canadian providers will always lose to an equivalent US strategy on cost. He wants to see governments remove that tax to correct what he views as an imbalance.
Yufest notes, too, that Canadian registered accounts allow for investments in foreign assets with the same tax rules as Canadian assets. US equivalents, like a Roth IRA, have more complex tax rules around foreign assets which incentivize domestically-listed investments. Yufest says that these rules functionally see the Canadian taxpayer subsidizing US ETF companies. Yufest wants to see some element of government matching for investments in Canadian-listed ETFs to correct what he sees as an imbalance.
"We're not saying make it illegal to buy Geman ETFs or American ETFs. But what we are saying is, remove some of the structural barriers that have been imposed on us that caused the asymmetry between Canada and the US," Yufest says. "Let us compete on a level playing field, then the market will decide who's better."
Yufest and CETFA’s standard for Canadian-ness in ETFs is limited to the country where the product is listed. The organization has no problem with US-based companies, so long as they list products on Canadian exchanges.
While Yufest argues that nobody in the Canadian ecosystem benefits from this influx of US product, the case could be made that investors and their advisors still benefit from a wider array of choices. Yufest accepts that argument, but notes that the ability for Canadian advisors to gain appropriate recourse from the closure or collapse of a US fund, or an incident of fraud, could be murkier than in the case of a Canadian-listed product. He believes that advisors should factor in regulatory oversight and capacity for recourse when assessing product suitability, and that Canadian-listed products will be better for advisors and their clients in that respect.
He argues, too, that these US-listed products are designed for US investors. US retirement needs and registered accounts are factored into the design of these products, not Canadian rules. Yufest believes that if this rule change hollows out the Canadian ETF business, fewer products will come to the Canadian market that suit the unique needs of Canadian investors.
“The advisor needs to weigh what is the right answer for your client. If it's only singularly money and returns, and they think they can do that in the US, and they're not at all worried about all this other stuff, then that's a conversation for the advisor and the investor to have,” Yufest says. “I would suggest, though, that there's more to it than just returns.”
