Double counting of assets is ETF industry’s $15 billion open secret
The Canadian ETF industry has been experiencing explosive growth in recent years, but it may not be quite as big as investors are being led to believe.
That’s because the assets-under-management figures touted by the industry and some providers are “double counting” as much as $15 billion in assets held in a growing class of “fund of fund” products.
Most of the top Canadian providers have launched ETFs of ETFs, which tend to follow broad strategies and direct their assets into one or more of a provider’s base ETFs. When AUMs are being calculated, assets placed in the fund of fund products end up being counted twice — once for those products and again as part of each individual product under its umbrella.
While investors may be unaware of the phenomenon, it’s an open secret among professionals and researchers who told the Financial Post it is an industry convention to report AUMs this way. The result is that some ETF providers appear to be larger than they actually are, as does the industry as a whole.
According to the National Bank of Canada, the Canadian ETF industry has a combined AUM of $188 billion when the reported AUMs of all the ETFs are added up. But when double counting is removed, that figure falls to $173 billion, a decrease of nearly eight per cent.
As for ETF flows, year-to-date as of the end of September, they’re actually $14.2 billion instead of $15.6 billion, the bank said.
“Double counting is a marketing tactic — it’s a show of force,” said Mark Noble, senior vice-president of ETF strategy at Horizons ETFs. “The money is going into those funds to show some sort of AUM and volume because, by and large, rightly or wrongly, usually the deciding factor on if (investors) buy an ETF in an asset class is whether it’s the largest or not.”
Horizons, Noble said, does not remove double counting from its ETF AUMs. The firm has three asset allocation products that are comprised entirely of it own ETFs and an additional four that are made up of the ETFs of other providers, such as KraneShares and iShares.
According to a Financial Post analysis, BMO Global Asset Management, the second-largest ETF provider in Canada, does not remove double counting either.
On its website, BMO, which has 19 ETF of ETF products, says that it had $59.3 billion in ETF assets under management as of the end of September.
The Post added the individual AUMs of each of the 118 ETFs that BMO has listed online, including the 19 ETF of ETF products, and calculated their combined worth to be $59.91 billion as of Oct. 7.
Adjusted for the double counting of holdings in the 19 ETF of ETFs, BMO’s total AUM dips to $52.93 billion, a decline of more than 11 per cent.
The Post provided its analysis to BMO, which did not respond to a request for comment.
Vanguard, which ranks third in the ranking of ETF providers by AUM, has five asset allocation ETFs of ETFs, entirely made up of its own products. It also did not respond to a request for comment on the matter.
There’s no real impetus to correct the numbers for double counting, Noble said, and there’s a clear benefit to providers for releasing the AUM figures as they currently do.
There’s no real impetus to correct the numbers for double counting, and there’s a clear benefit to providers for releasing the AUM figures as they currently do.
Mark Noble, senior V-P, ETF strategy, Horizons ETFs
Noble said that he’s seen new products accumulate hundreds of millions in AUM in weeks, only to dig into their holdings and find out that most of the flows are not coming from new investors, but from a provider’s other ETFs or mutual funds.
He describes it as providers “cannibalizing” themselves.
The AUM question aside, ETFs of ETFs are gaining popularity among investors, who are seeing the the benefit of potentially holding thousands of securities instead of hundreds through a regular ETF. Some of the new products, such as BMO’s and Vanguard’s asset allocation ETFs, replicate an entire portfolio by holding sub-ETFs of equities and fixed income in weighting combinations that match conservative, balanced and growth mindsets.
The provider not only benefits from being able to introduce more of these new products to the market but is also able to make their existing ETFs — the ones that will be held within — larger and therefore more appealing.
Daniel Straus, National Bank of Canada vice-president of ETFs and financial product research, said that externally double counting ETF AUMs is not illegal.
It also doesn’t appear to put investors at harm, he said.
“I don’t think there’s any impact to investor returns that come from this practice because the size of the assets in a fund complex only really matter to the managers and shareholders of that company rather than the investors in the trusts who are getting the return experience of the underlying holdings,” Straus said.
In fact, it might benefit them. Many ETFs of ETFs are created for the purpose of giving investors a hedged option. BMO has done this with 11 of its products, creating an ETF of an ETF that mirrors an already existing BMO fund and simply hedges it to Canadian currency. Straus said when one of the two trades a lot and sees its liquidity boosted, the other will automatically follow.
I don’t think there’s any impact to investor returns that come from this practice
Daniel Straus, vice-president, ETFs and financial product research, National Bank of Canada
Straus, who publishes National Bank’s ETF research, keeps track of double counting and has written about it in his reports, but when he publishes monthly updates on Canada’s sector, he still uses the AUMs that are advertised by the providers. Strategic Insight, a research firm that also monitors the ETF industry also publishes research using numbers that haven’t been adjusted to exclude double counting.
Both National Bank and Strategic Insight’s research is also published by the Canadian ETFs Association on its online website. When reached by the Post, Canadian ETF Association executive director Pat Dunwoody said she uses these reports in the group’s discussions with government officials about the industry’s growth.
Dunwoody is well aware of double counting in both the mutual fund industry and the ETF industry, but did not know that the research used by CETFA did not account for this.
“My assumption had been that they pulled out the double counting,” Dunwoody said. “What I will say from an association point of view is I want accurate information.”
As the ETF industry continues to grow, Noble said he expects it will see a continued shift toward more ETF of ETFs products. The Canadian market already has 850 ETF products and there are few, he said, who can explain the difference between them. Selling bundles of ETFs under one product is just another way to make that process easier for investors.
That growth will likely lead to further confusion about double counting, he admits. Worse, it’ll make it more difficult to determine if providers are actually raising new money from new investors or funnelling their own cash into their products. There’s even the potential for triple counting to ensue, he said, if more mutual funds begin to hold ETFs of ETFs.
As for investors, they’ll be left to wonder just how much the ETF industry is actually growing.