Canadian investors are getting access to a fund from Greenwich, Conn.-based AQR Capital Management LLC as the firm’s Apex strategy becomes available through the iCapital platform.

Co-founder Cliff Asness’s AQR, which manages US$99 billion in assets, is known for its quantitative investment strategies. Apex is a multi-strategy alternative fund that incorporates macro, stock selection and arbitrage strategies.

“Apex represents the culmination of our research process that has been honed over our 25-year history and reflects our foundational belief in generating attractive, diversifying returns,” said AQR co-founder David Kabiller in a release.

The Apex strategy, launched in 2020, posted net returns of 16.2% in 2023 and 17.1% in 2022, according to a person familiar with the fund’s performance who asked not to be identified. Its annualized return since inception is 18.5%.

The fund will be available to accredited investors through investment platform iCapital as the iCapital AQR Apex Canadian Access Fund.

NEI goes alternative

NEI Investments has launched its first alternative fund, a long-short strategy subadvised by Picton Mahoney Asset Management that maintains NEI’s responsible investing focus.

The NEI Long Short Equity Fund adds exclusionary screens, ESG integration and stewardship to Picton Mahoney’s active long-short equity strategy.

John Bai, senior vice-president and chief investment officer with NEI, said investors are looking to alternative strategies for lower correlations, risk and volatility.

“I think the combination of our in-house responsible investing expertise combined with Picton Mahoney’s specialized experience in alternatives addresses an important gap in the market,” he said in a release.

The management fee is 1% for series F and 2% for series A.

CIBC introduces target-maturity bond funds

CIBC Asset Management is the latest firm to offer target-maturity bond funds, with three new products that mature in 2025, 2026 and 2027.

The three CIBC Investment Grade Bond Funds invest primarily in Canadian government and investment-grade corporate bonds, prioritizing bonds trading at a discount to their maturity value. Foreign issuers aren’t expected to make up more than 10% of the funds.

“This is the first time in decades that a considerable amount of bonds within the Canadian bond market are trading at a discount to par,” said David Scandiffio, president and CEO of CIBC Asset Management, in a release.

The funds operate like individual bonds, terminating at a defined maturity date with net assets distributed to investors. Firms including CIBC are pitching target-date funds as a more convenient way to build bond ladders for clients.

The management fee on the three CIBC funds is 0.15% for series F and 0.40% for series A.

CI releases mutual fund versions of dividend ETFs

CI Global Asset Management introduced three dividend mutual funds that invest in existing ETFs.

The funds target quality large-cap, dividend-paying companies that grow their dividends over time, CI said.

The CI WisdomTree Canada Quality Dividend Growth Index Fund (management fees of 0.16% for series F and 1.16% for series A), the CI WisdomTree U.S. Quality Dividend Growth Index Fund (0.30% and 1.30%) and the CI WisdomTree International Quality Dividend Growth Index Hedged Fund (0.43% and 1.43%) each invest in the underlying ETF of the same name.

Mark Burgess

News

Mark has been the managing editor of Advisor.ca since 2017. He has been covering business and politics for more than a decade. Email him at markb@newcom.ca.

December was the 10th consecutive month of net redemptions for mutual funds, though the monthly outflow continued to slow.

Data from the Investment Funds Institute of Canada (IFIC) released Thursday showed mutual fund net redemptions were $5.3 billion last month, compared to $8.6 billion in November and $12.5 billion in October.

Redemptions were driven by outflows from balanced and equities funds, IFIC’s report said, while bond funds, money-market funds and specialty funds all had net inflows.

For all of 2023, money-market funds led with $14.8 billion in net sales — more than double the previous year. Bond mutual funds were second, with net sales of $7.0 billion compared to redemptions of $13.8 billion in 2022. And net sales of specialty mutual funds came in third at $3.4 billion — more than two and a half times greater than in 2022.

Overall, mutual fund redemptions totalled $57.1 billion in 2023, compared to $43.7 billion in redemptions in 2022, IFIC said — an increase of 30.5%.

On the ETF side, net sales were $3.8 billion in December, compared to $5.1 billion in November and $2.9 billion in October.

ETF money-market funds had net redemptions of $271 million in December — the first month of negative money-market sales since November 2021, the report said. A National Bank Financial report from earlier this month noted the change in investor appetites toward year-end as rate expectations shifted.

The IFIC report said bond ETFs accounted for 48% of net inflows ($1.82 billion), with most going into Canadian bond funds. Equities ETFs accounted for 47% of net sales ($1.77 billion), with the largest share going to U.S. funds.

Overall, ETF net sales were $37.6 billion in 2023, compared to $36.1 billion in 2022 — an increase of 4.2%.

For the second consecutive month, both mutual fund and ETF assets increased in December, the report noted.

Mutual fund assets totalled $1.94 trillion at the end of December, up by $43.0 billion or 2.3% month over month, and up by $126.5 billion or 7.0% year over year.

ETF assets totalled $382.5 billion at the end of December, up by $13.2 billion or 3.6% since November, and up by $68.8 billion or 21.9% year over year.

Michelle Schriver

News

Michelle is Advisor.ca’s continuing education editor. She has worked with the team since 2015 and been recognized by the National Magazine Awards and SABEW for her reporting. Email her at michelle@newcom.ca.

Between performance issues, greenwashing concerns and politicization, U.S. sustainable funds suffered outflows in 2023, according to research from Morningstar Inc.

In a new report, Morningstar reported that investors pulled $5 billion (all figures in U.S. dollars) from U.S.-based sustainable funds in the fourth quarter, pushing annual outflows to $13 billion.

The bulk of the outflows came in a single fund, the iShares ESG Aware MSCI USA ETF, which saw more than $9 billion in withdrawals during the year.

At the same time, investors chilled on sustainable funds generally last year, the report said, as flows lagged the rest of the industry.

For instance, in the fourth quarter, net redemptions from sustainable funds amounted to 1.7% of fund assets at a time when funds overall recorded net inflows reaching 0.2% of assets, Morningstar reported.

“This marked the fifth consecutive quarter where investor appetite for U.S. sustainable funds was weaker than for their conventional counterparts,” it said.

This investor reticence came as sustainable equity fund performance lagged. The median return for a sustainable large-blend equity fund in 2023 came in at 20.8%, compared with 23.9% for the category overall, Morningstar reported.

“Some of the macroeconomic pressures that contributed to their underperformance — such as high interest rates and supply chain disruptions — continue to feature in market outlooks for 2024,” it said.

At the same time, the firm pointed to other factors — including persistent greenwashing concerns and political scrutiny of sustainable and ESG investing — as contributing to “a chilling effect on demand for these funds.”

Nevertheless, market gains boosted sustainable fund assets in 2023, which finished the year at $323 billion, up by 18% from the third quarter of 2022.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.

It took longer than many expected, but ETF providers in Canada are catching up on the artificial intelligence (AI) theme, with three new products out this week.

On Thursday, Invesco Canada Ltd. launched the Invesco Morningstar Global Next Gen AI Index ETF (TSX: INAI), offering exposure to companies that are expected to benefit from their role in advancing AI technologies. The index measures the market-cap-weighted performance of AI-focused companies in the Morningstar Global Markets Index.

The fund’s 48 holdings include Taiwan Semiconductor Manufacturing Co Ltd., Broadcom Inc. and Salesforce Inc., and its top holdings are five of the so-called magnificent seven stocks that drove market gains last year, with AI leaders Microsoft Corp. (9.6%) and Nvidia Corp. (7.2%) holding the largest weightings.

Those two companies are also the focus of new single-stock ETFs from Purpose Investments Inc. On Thursday, the firm released two more of its Yield Shares ETFs, which hold a single company and use covered-call writing and relatively modest leverage.

“We’re in the midst of the next technological revolution with AI, and Nvidia and Microsoft are at the forefront of this movement,” said Vlad Tasevski, head of asset management at Purpose, in a release.

The Nvidia (Cboe Canada: YNVD)  and Microsoft (Cboe Canada: MSFY) ETFs use a maximum of 25% leverage and covered calls to provide income as well as potential growth from the underlying stocks.

The new funds, which charge 0.40% in management fees, join five other Yield Shares ETFs that hold Tesla Inc., Amazon.com Inc., Apple Inc., Alphabet Inc. and Berkshire Hathaway Inc., respectively. Those funds, which launched in December 2022, have about $139 million in assets under management, most of that in the Tesla and Amazon ETFs.

Invesco’s AI ETF, which also comes in a Canadian dollar–hedged version, has a 0.35% management fee.

Despite the enthusiasm for AI last year driving stock market returns, the only AI-branded ETF in Canada for most of the year was an Emerge Canada Inc. fund that was liquidated in October and terminated last month.

In November, Horizons ETFs Management (Canada) Inc. changed the name of the Horizons Robotics and Automation Index ETF to the Horizons Robotics & AI Index ETF (TSX: RBOT).

Many other big-tech or innovation-themed products in Canada offer AI exposure even if they aren’t labelled as such, and broad index funds hold leading companies in the space including Nvidia and Microsoft.

Invesco and Horizons introduce new income funds

Invesco also launched a new ETF Thursday that provides income by investing in U.S. Treasury floating-rate notes with time-to-maturity of one month or more. The Invesco US Treasury Floating Rate Note Index ETF (USD) (TSX: IUFR.U) seeks to replicate the performance of the FTSE U.S. Treasury Floating-Rate Note Index.

At launch, about half the holdings were notes with maturities of one year or less, and the other half was invested in notes with maturities of one to five years.

The ETF, which has a management fee of 0.12%, is also offered in a U.S.-dollar version.

Horizons ETFs also released a new income product: the Horizons USD High Interest Savings ETF (TSX: UCSH.U), which invests in high-interest U.S. dollar deposit accounts with Canadian banks.

The ETF, which has a 0.14% management fee, “offers investors a way to earn monthly income on U.S. dollar cash deposits, at a time when the U.S. Federal Reserve’s rate is at a 22-year high,” said Horizons president and CEO Rohit Mehta in a release.

The new fund joins the $4.3-billion Horizons High Interest Savings ETF and the $622.3-million Horizons 0–3 Month T-Bill ETF, which launched last year, in Horizons’ suite of cash products.

Stricter liquidity rules that take effect at the end of this month have led to concerns that ETF issuers will be forced to lower the interest rates offered on high-interest savings account funds.

Correction: An earlier version of this article misstated the yield on the Horizons USD High Interest Savings ETF. The yield on the new fund hasn’t been published.

Mark Burgess

News

Mark has been the managing editor of Advisor.ca since 2017. He has been covering business and politics for more than a decade. Email him at markb@newcom.ca.

With investors pricing in rate cuts this year, Guardian Capital has introduced a suite of target-maturity bond funds, a niche category that proved popular in 2023 among investors looking to lock in bond yields with more certain income.

The GuardBond suite of funds released last week consists of five actively managed Canadian investment-grade corporate bond funds. The funds have defined dates when the bonds mature and the net asset value is returned to investors — in 2024, 2025, 2026 and 2027 — and there’s also a one-to-three-year laddered fund of funds.

Traditional bond ETFs have no termination date and their duration remains stable. As with directly held bonds, durations for target-date ETFs decrease as they approach maturity.

“Because the bonds are not being sold, the income they’re paying today is basically the income those bonds in the portfolio will continue to pay until they mature,” said Mark Noble, senior vice-president of retail strategy with Guardian Capital.

Holding bonds to maturity removes the risk of daily mark to market losses, Noble said, so default becomes the main risk — an extreme rarity in Canadian investment grade.

RBC has been offering target-maturity bond ETFs since 2011, but the funds doubled in size last year to $2.4 billion, leading National Bank Financial to call target-maturity funds the “rising stars” of the ETF world in 2023. RBC expanded its lineup last year to include target-date government bond ETFs in addition to its corporate bond funds.

Unlike RBC’s index funds, Guardian has taken an active approach to its Canadian investment-grade holdings.

Noble pitched the Guardian funds as a potential alternative to popular GIC ladders, offering extra yield without adding much risk. And, while conventional GICs can’t be cashed in before maturity, investors in target-date funds can sell early. The risk, however, is that the ETF could be trading below the value that will be payable at maturity.

The funds could also be a solution for advisors who run their own bond ladders, Noble said, which can be difficult to manage.

“Canadian corporate bonds trade over the counter, which means that they’re opaque in terms of their pricing,” he said. “Sometimes, they can be difficult to sell, and it’s also time-consuming and costly.”

ETF units of the five funds are trading on Cboe Canada, with management fees of 0.20%. The management fees  for the mutual funds are 0.20% for Series F and 0.70% for Series A.

CI launches new factor ETFs

CI Global Asset Managementlaunched new U.S. equity ETFs Tuesday that track the momentum and value factors: the CI U.S. Enhanced Momentum Index ETF (TSX: CMOM) and the CI U.S. Enhanced Value Index ETF (TSX: CVLU).

The ETFs, which also come in unhedged versions, track new indexes from New York–based VettaFi LLC. Both funds have a 0.30% management fee and a medium risk rating.

Exiting the metaverse

Evolve Funds Group Inc. is terminating the Evolve Metaverse ETF (TSX: MESH).

Evolve and Horizons ETFs Management (Canada) Inc. launched competing metaverse ETFs in November 2021, not long after Facebook changed its name to Meta Platforms Inc.

The launch also coincided with the peak of the pandemic bull market. The actively managed MESH returned -48.6% in 2022 before rebounding sharply last year, posting a 56.2% gain for 2023. The passive Horizons Global Metaverse Index ETF (MTAV) dropped 36.7% in 2022 before posting a 53.4% gain last year.

Evolve’s fund, which has $6.2 million in assets under management (AUM), will stop taking new subscriptions on Feb. 22 and delist a month later.

Horizons’ metaverse ETF has AUM of just less than $5 million, while metaverse ETFs from CI Global Asset Management and Fidelity Investments Canada ULC, launched in May 2022, have $1.1 million and $6.4 million, respectively.

Mark Burgess

News

Mark has been the managing editor of Advisor.ca since 2017. He has been covering business and politics for more than a decade. Email him at markb@newcom.ca.

A day after U.S. regulators approved spot bitcoin ETFs, Canadian providers find themselves facing new competition, especially when it comes to fees.

The Securities and Exchange Commission approved 11 funds from asset managers such as BlackRock, Invesco and Fidelity late Wednesday.

The highly anticipated move creates new competition for Canada-listed bitcoin ETFs, which have an almost three-year head start but also come with higher management fees in some cases.

The fees on the 11 new U.S. bitcoin ETFs range from as low as 0.20% to 1.5%, and some firms are competing by waiving management fees for a certain period of time.

In Canada, the $2.2-billion Purpose Bitcoin ETF, the world’s first spot bitcoin ETF that launched in February 2021, has a management expense ratio (MER) of 1.49%.

On Thursday, Fidelity Investments Canada ULC said it was reducing the management fee of its Canada-listed Fidelity Advantage Bitcoin ETF to 0.39%, with an expected MER of 0.44% as of Jan. 12. The ETF’s MER as of Sept. 30 was 0.95%.

The U.S.-listed Fidelity Wise Origin Bitcoin Fund, which was approved Wednesday, has a 0.25% management fee that the fund manager is waiving until Aug. 1.

Other Canadian bitcoin ETFs also charge higher fees than the cheapest U.S. funds. The $541-million CI Galaxy Bitcoin ETF has a 0.40% management fee and 0.80% MER as of June 30. The $141-million Evolve Bitcoin ETF has a management fee of 0.75%. The 3iQ Bitcoin ETF’s management fee is 1% and its MER is 1.75%.

Purpose and Evolve both said they don’t plan to reduce fees on their funds.

Purpose chief investment officer Greg Taylor pointed to his firm’s history of managing the product through volatile periods.

“[W]hile fees are one component of the decision of where to invest, we think investors should put more of an emphasis on safety and track record when making that decision,” he said in an emailed statement.

Some analysts think that ETFs may help stabilize crypto prices by broadening their use and potential audience. But many remain concerned that crypto ETFs will place too much risk and volatility into Americans’ retirement accounts.

“The notorious price volatility of bitcoin, as well as its fluctuating values against stablecoins and other cryptocurrencies, could expose mainstream investors to a less familiar spectrum of investment risks,” said Yiannis Giokas, senior director of Moody’s Analytics.

The price of bitcoin was swinging on Thursday, a day after the approvals. Bloomberg reported that, as of 1 p.m., more than US$3.5 billion in shares of the 11 U.S. ETFs had traded.

Staff, with files from The Associated Press

The Associated Press is an American not-for-profit news agency headquartered in New York City.

Unitholders of five Emerge Canada Inc. ETFs have become unsecured creditors of the fund manager now that the firm has failed to repay $4.7 million to the funds.

Emerge Canada was unable to pay its outstanding receivable before terminating its ETFs last month, but “continues to work towards payment to unitholders,” the manager wrote in a letter dated Jan. 5 addressed to unitholders of five of its Emerge ARK ETFs.

On May 11, the Ontario Securities Commission (OSC) suspended Emerge Canada’s registration for capital deficiency, highlighting a receivable owed to five of its Emerge ARK ETFs that had grown to $5.5 million. The receivable totalled $4.69 million as of Dec. 29, including interest.

The flagship Emerge ARK Global Disruptive Innovation ETF (EARK) and the Emerge ARK Genomics & Biotech ETF (EAGB) are owed the most, with the outstanding receivables for each fund representing about 5.6% of the net asset value (NAV) for each ETF as reported by Emerge on Dec. 15.

In dollar amounts, the EARK receivable is $3.9 million and the EAGB receivable is about $590,000.

The receivables represent between 0.55% and 1.50% of the NAV for the remaining three ETFs with money owed, or between $40,000 and $80,036. The receivable has been accruing interest at 2.5% annually since 2020.

The five Emerge ARK ETFs were fully liquidated on Oct. 31, but were terminated on Dec. 29 following the non-payment of the receivable.

The other six Emerge ETFs, including the ARK space exploration ETF, were not owed a receivable and were terminated on Dec. 20 after also being liquidated on Oct. 31.

All 11 ETFs had been untradeable since the OSC placed them under a cease-trade order (CTO) on April 6, after Emerge missed its deadline to file audited annual financial statements. The order represented the first time a CTO had been placed on a family of ETFs in Canada.

The unusual events continue with the funds’ termination. Speaking to Advisor.ca last month, Dan Hallett, vice-president of research and principal with Oakville, Ont.’s HighView Asset Management Ltd., said he can’t recall another instance of unitholders becoming creditors to an ETF sponsor in the past 30 years.

Emerge Canada Inc. is the subject of a proposed class action being brought by Kalloghlian Myers LLP in Toronto, which alleges that unitholders suffered damages as a result of Emerge’s misconduct and the cease-trade order. The class action has not been certified.

Toronto-based AUM Law was appointed on Nov. 1 to monitor the wind-down of the ETFs. Following the orderly wind-down of all 11 ETFs, Emerge Canada Inc.’s registration will be fully suspended by the OSC.

Large losses

Following the liquidation announcement on Dec. 20, unitholders of the Emerge ETFs began receiving the proceeds of their investments, minus liabilities and fund expenses, and without receiving their portion of the receivable.

Several unitholders saw significant losses, largely due to the ETFs’ performance.

Frank Soodaye, a DIY investor in Mississauga, Ont. who had periodically invested in EARK between June 2022 and the cease-trade order in April 2023, told Advisor.ca he received about $10,000 back on his $16,000 investment.

Manny, a DIY investor in Ontario, received about 30% of his $2,000 investment in EARK back. “It’s been a big lesson learned and an eye opener,” he said. (Advisor.ca agreed to identify Manny by his first name only.)

Returns on a NAV basis for the six Emerge ARK funds between April 6, the day of the cease-trade order, and Oct. 31 ranged from -19.80% for EAGB to 2.36% for the autonomous tech and robotics ETF. The EARK fund returned -6.67%.

In its letter, Emerge stated it will arrange for any receivable payments to be made through the Canadian Depository for Securities and will notify unitholders on its website when payment has been completed.

Emerge ETFs timeline

• Nov. 3, 2022: BDO LLP resigns as auditor of the Emerge Canada Inc. funds
• March 31, 2023: Deadline by which Emerge Canada was supposed to file annual audited financial statements
• April 6: Cease-trade order issued on all 11 ETFs managed by Emerge Canada
• April 14: Advisor.ca reports that Emerge Canada’s suite of six ARK ETFs is owed more than $2.5 million in receivables from Emerge
• May 11: Emerge Canada suspended for capital deficiency
• July 14: Liquidation date for the U.S. versions of the five EMPWR ETFs
• August: In documents filed with the Erie County Clerk, a woman hired in February 2022 as an executive assistant with Buffalo, N.Y.-based Emerge Capital Management Inc. alleges she was not paid wages from Dec. 16, 2022, until March 6, 2023
• Sept. 15: Five U.S. EMPWR ETFs apply to the U.S. Securities and Exchange Commission to deregister
• October: Three employees of Emerge Canada Inc. file a notice of motion against CEO Lisa Langley and Emerge Capital Management Inc. for failing to repay nearly US$200,000 they lent the firm earlier in the year
• Oct. 31: Date of Emerge Canada ETF liquidations
• Dec. 20: Pro rata shares paid out to unitholders “on or before” this date; ETFs without receivables terminated
• Dec. 29: Termination date of the five Emerge ARK ETFs with outstanding receivables
• Jan. 5: Emerge announces its unitholders have become unsecured creditors

Melissa Shin

Melissa is the editorial director of Advisor.ca and leads Newcom Media Inc.’s group of financial publications. She has been with the team since 2011 and been recognized by PMAC and CFA Society Toronto for her reporting. Reach her at mshin@newcom.ca. You may also call or text 416-847-8038 to provide a confidential tip.

ETF assets under management in Canada ended 2023 at a new all-time high as markets rebounded and steady flows from investors continued, particularly into fixed-income funds.

After $38.4 billion flowed into Canadian ETFs last year, industry assets totalled $383.2 billion, according to a report from National Bank Financial. That’s up from $314 billion at the end of 2022, when historic drawdowns in both stocks and bonds led ETF assets to dip for the first time in 20 years.

ETF gains came amid another down year for mutual funds, with redemptions totalling $51.9 billion as of Nov. 30 (full-year data will be released later this month). The outflows have allowed ETFs to gain market share, the report said, with ETF assets now totalling almost 16% of mutual fund assets.

Fixed-income ETFs led flows for the second year in a row, gathering a record $21.4 billion in new assets.

“The common thread of demand is still cash-like or money market ETFs, which were 44% of total fixed-income ETF flows, the largest inflow segment by far,” the report said.

Another 40% went to broad-based bond ETFs while 17% went to long-term funds, which suffered most as interest rates rose in 2022.

“While cash-like ETFs remain popular, many investors have started to swim to the deeper end of the duration and credit pool searching for opportunities that may have been beaten up during the brutal bond year of 2022,” the report said.

As rate expectations shifted in November, flows into money market and cash alternative ETFs decelerated and turned negative in December as investor appetites changed.

A report from TD Securities attributed the decline in popularity of high-interest savings account ETFs to stricter liquidity rules announced in late October that take effect at the end of this month.

The higher requirements led to concerns that ETF issuers would be forced to lower the interest rates offered on the funds — concerns the TD report said have been borne out.

While gross yields of around 5.10% for Canadian-dollar ETFs and 5.40% for U.S.-dollar products are still attractive, TD said, “these yields are already 30 to 40 [basis points] lower than the pre-review levels. As a result, investors are perhaps hesitant to pump more money into these products given potential changes in yields.”

Cash ETFs dominated inflows, but National Bank called target-maturity bond ETFs — which have a specified maturity date when the final net asset value is returned to unitholders — the “rising stars” of 2023. The funds, which have existed since 2011, doubled in size last year to $2.4 billion.

The report said advisors were likely using target-maturity ETFs “to minimize interest rate risk while mimicking individual bond investments.”

Equity ETFs brought in almost $13 billion, according to National Bank, surging in the end-of-year market rally after a slow start. Despite the strong performance, U.S. equity ETFs saw the smallest inflows ($641 million) in a decade.

Option-based ETFs (largely covered-call funds) attracted $4 billion for their best-ever year, bringing the category total to $19.8 billion.

Asset allocation ETFs, meanwhile, recovering from a historically bad 2022 for 60/40 portfolios, took in a steady $3 billion last year, according to the report, while ESG ETFs gather $4.6 billion.

There are now 40 ETF providers in Canada offering 1,339 products, National Bank said.

Four providers left the ETF market last year (Smartbe, NCM, Evermore and Emerge), while two new issuers — Forstrong and Tralucent — launched products.

And while there were 164 new ETFs launched, 2023 saw a record number of delistings, at 122 — more than triple the 2022 total. National Bank attributed the closures to the four providers exiting the market as well as significant “pruning” of lineups from Invesco Canada Ltd. and CI Global Asset Management.

Looking ahead, TD Securities said fixed-income ETFs may be less attractive if central banks begin to cut interest rates, a move that could further boost equity markets. On the product development side, the report suggested issuers may appeal to yield-hungry Canadian investors with more enhanced products.

TD also noted that the integration of self-regulatory organizations in Canada could further boost ETFs and narrow the asset gap with mutual funds.

Mark Burgess

News

Mark has been the managing editor of Advisor.ca since 2017. He has been covering business and politics for more than a decade. Email him at markb@newcom.ca.

Emerge Canada Inc. has liquidated its 11 ETFs that have been under a cease-trade order since April, but the fund manager still has not repaid the millions it owes to five of those funds.

Emerge told unitholders Wednesday that the six Emerge ARK ETFs and the five Emerge EMPWR ETFs were “fully liquidated by Oct. 31,” with the sale proceeds held by RBC Investor Services Trust earning 4% interest.

Unitholders received the proceeds of their investment minus liabilities and fund expenses, and without receiving the money owed by Emerge Canada Inc. to five of the six Emerge ARK ETFs.

The ETFs had been untradeable since the Ontario Securities Commission (OSC) placed a cease-trade order (CTO) on all 11 of Emerge Canada Inc.’s ETFs on April 6, after Emerge missed its deadline to file audited annual financial statements. The order represented the first time a CTO had been placed on a family of ETFs in Canada.

On May 11, the OSC suspended Emerge Canada’s registration for capital deficiency, highlighting a receivable owed to five of its Emerge ARK ETFs that had grown to $5.5 million.

As of Dec. 20, Emerge told unitholders that the outstanding receivables totalled $4.69 million, which is about $800,000 lower.

The flagship Emerge ARK Global Disruptive Innovation ETF (EARK) and the Emerge ARK Genomics & Biotech ETF (EAGB) are owed the most, with the outstanding receivables for each fund representing about 5.6% of the net asset value (NAV) for each ETF as reported by Emerge on Dec. 15.

The receivables represent between 0.55% and 1.50% of the NAV for the remaining three ETFs with money owed.

In a notice to unitholders, Emerge said that if it can repay the receivable by Dec. 29, the payments will go to unitholders via their dealers, with no expenses deducted. The five ETFs will then be terminated.

If the receivable is not paid by Dec. 29, the unitholders will become unsecured creditors of Emerge Canada and the ETFs terminated.

Dan Hallett, vice-president of research and principal with Oakville, Ont.’s HighView Asset Management Ltd., said he can’t recall another instance of unitholders becoming creditors to an ETF sponsor in the past 30 years.

Hallett said he hopes the receivable is repaid, but suggested that unitholders “not actually count on it unless the final payment has been received, just based on how long this has been tied up.”

If the receivable isn’t paid, “it’s not a massive percentage” of the NAV, he said, acknowledging this is cold comfort to unitholders. “It’s meaningful enough that it will hurt, but it’s not the most costly of lessons” since investors are still receiving the sale proceeds.

“Emerge’s disclosure to unitholders is completely inadequate,” said Garth Myers, a partner with Kalloghlian Myers LLP in Toronto, which has filed a proposed class-action lawsuit against Emerge. “It fails to contain particulars in relation to the costs to unitholders caused by their misconduct, particularly in relation to the liquidation of these assets.”

Myers said his firm intends to move forward with the class action even if Emerge fully repays its receivables by Dec. 29, because “we still don’t know the extent of the damages caused,” he said. “The receivables are only part of it.”

The class action has not been certified.

Emerge Canada Inc. declined to comment for this story.

Toronto-based AUM Law was appointed on Nov. 1 to monitor the wind-down of the ETFs. Following the orderly wind-down of all 11 ETFs, Emerge Canada Inc.’s registration will be fully suspended by the OSC.

Lost opportunities

“If we recap the experience investors have had, the communications have been poor, the transparency has been lacking,” said Yves Rebetez, partner with Credo Consulting Inc. in Oakville, Ont. “And then the execution of it all and the end result leave me going ‘Wow.'”

The Oct. 31 liquidation date means the Emerge ARK ETFs missed out on the spectacular technology run-up last month. Cathie Wood’s ARK Innovation ETF, upon which EARK is based, returned 31.1% for the month of November following three straight months of losses. The returns represent the ETF’s strongest month since inception.

Furthermore, “in November, the BMO ARK Innovation Fund was the top performing equity fund in Canada, inclusive of mutual funds and ETFs,” said Danielle LeClair, director of manager research with Morningstar Canada. “This year, cryptocurrency funds have had the strongest performance, but in November [the BMO fund] beat out even those strategies.”

Returns on a NAV basis for the six Emerge ARK funds between April 6, the day of the cease-trade order, and Oct. 31 range from -19.80% for EAGB to 2.36% for the autonomous tech and robotics ETF. The EARK fund returned -6.67%.

Rebetez questioned why investors needed to wait until late December to receive the net sale proceeds if the funds were fully liquidated by Oct. 31, adding that with Canadian and U.S. markets moving to next-day settlement in 2024, the delay seems even less reasonable.

“It’s not T+1 [yet], but it shouldn’t be T+50,” he said. By holding on to the proceeds, the manager was “taking away from the investor that opportunity to do market timing. … You don’t get to redeploy the funds, and you missed out on the investment that you wanted in the first place, which has since then exploded.”

Lessons learned

Rebetez said he hopes the Emerge case will lead to industry and regulatory reflection.

“What’s the reasonable amount of time so investors don’t find themselves in this kind of situation again? How do we close the gap between [Emerge’s issues] having initially been disclosed and [granting] access to people’s funds so it doesn’t take as long?” he said. “The regulators need to revisit this kind of situation and find out how they can prevent this from reaching the stage it reached so [they] can protect investors prior to this becoming a problem.”

Rebetez and Hallett also pointed to the accounting rules that allowed Emerge to accumulate such a large receivable.

“What does that say about the governance model for mutual funds and ETFs that [the receivable] was allowed to persist and grow to the extent that it did?” Hallett said. (A receivable was first reported by Emerge in its 2019 financial statements.)

“It goes back to acceptable accounting principles and materiality,” Rebetez said. “If the [receivable] is $100,000 and there’s $100 million in assets, it’s not a big deal. But by the time it gets to a million dollars and then it grows to $5 million, Houston, we have a problem, right? What it says to me is the oversight is flat-footed or lacking, and by the time some action is taken, it’s already too late.”

Hallett said the main lesson for the industry is the importance of due diligence on fund companies — for financial advisors and retail investors alike.

The receivable information “was right there in the financial statements; there was nothing hidden,” Hallett said. “It was a big number and it grew every time.”

And Hallett, who has spent the majority of his career advocating for investors, said do-it-yourself investors must also perform this type of analysis, though he recognizes that many DIYers choose securities based on rumours and stories.

“You have to have a good due diligence process where you have a checklist on every product, because you don’t know where you’re going to find a problem if there’s a problem,” he said. “If you’re doing it yourself, it’s incumbent on you to know what you’re buying.”

Emerge ETFs timeline

• Nov. 3, 2022: BDO LLP resigns as auditor of the Emerge Canada Inc. funds
• March 31: Deadline by which Emerge Canada was supposed to file annual audited financial statements
• April 6: Cease-trade order issued on all 11 ETFs managed by Emerge Canada
• April 14: Advisor.ca reports that Emerge Canada’s suite of six ARK ETFs is owed more than $2.5 million in receivables from Emerge
• May 11: Emerge Canada suspended for capital deficiency
• July 14: Liquidation date for the U.S. versions of the five EMPWR ETFs
• August: In documents filed with the Erie County Clerk, a woman hired in February 2022 as an executive assistant with Buffalo, N.Y.-based Emerge Capital Management Inc. alleges she was not paid wages from Dec. 16, 2022, until March 6, 2023
• Sept. 15: Five U.S. EMPWR ETFs apply to the U.S. Securities and Exchange Commission to deregister
• October: Three employees of Emerge Canada Inc. file a notice of motion against Lisa Lake Langley and Emerge Capital Management Inc. for failing to repay nearly US$200,000 they lent the firm earlier in the year
• Oct. 19: Emerge Canada announces it’s liquidating its 11 ETFs
• Oct. 31: Date of fund liquidations for all 11 Emerge Canada ETFs
• Dec. 20: Pro rata shares paid out to unitholders “on or before” this date; ETFs without receivables terminated
• Dec. 29: Termination date of the five Emerge ARK ETFs with outstanding receivables, whether or not the receivables are paid

Melissa Shin

Melissa is the editorial director of Advisor.ca and leads Newcom Media Inc.’s group of financial publications. She has been with the team since 2011 and been recognized by PMAC and CFA Society Toronto for her reporting. Reach her at mshin@newcom.ca. You may also call or text 416-847-8038 to provide a confidential tip.

CIBC Asset Management and Franklin Templeton Canada are the latest fund managers to roll out private market strategies for accredited retail investors, with new credit and real estate products, respectively.

On Friday, CIBC Asset Management released the CIBC Ares Strategic Income Fund, a private credit strategy that provides access to the Ares Strategic Income Fund managed by Los Angeles-based Ares Capital Management LLC.

Three-quarters of the fund is invested in private credit — the vast majority in directly originated first lien loans to U.S. companies, and a smaller portion in structured credit, real assets lending and distressed debt. The other quarter is in liquid public credit assets, including corporate bonds and high-conviction syndicated corporate loans.

Last December, CIBC expanded its partnership with Ares by investing $400 million into Ares private credit funds via existing CIBC funds. At the time, CIBC said it planned to launch new products for high-net-worth clients that provide evergreen access to Ares funds. The CIBC Ares Strategic Income Fund is the first.

In the past year, several fund managers have moved into private markets with new evergreen products designed for wealthy retail investors looking to diversify their portfolios.

Last month, Franklin Templeton Canada introduced access to a fund in partnership with New York-based real estate investment firm Clarion Partners. The private real estate strategy is focused on multi-family apartments, industrial warehouses and science facilities. Its target allocation is 60% private real estate and 40% real estate securities, including commercial and residential mortgage-backed securities.

The CIBC fund, which has a minimum investment of $10,000, has monthly subscriptions and distributions, with quarterly redemptions up to 5% of the fund’s assets. There’s a 2% penalty for redemptions within the first year.

The management fee is 0.50% for series F of the CIBC fund, which doesn’t have a performance fee. The underlying Ares fund has a management fee of 1.25% as well as a two-part performance fee: 12.5% of net income subject to a 5.0% annualized hurdle; and 12.5% cumulative realized capital gains net of realized and unrealized losses.

Terminations and mergers

Horizons ETFs Management (Canada) Inc. is closing three ETFs, including its bull and bear marijuana products.

Horizons said this week that its BetaPro Marijuana Companies 2x Daily Bull ETF (TSX: HMJU) and BetaPro Marijuana Companies Inverse ETF (TSX: HMJI) will close in February.

HMJU, which seeks to provide returns corresponding to two times the daily performance of the North American MOC Marijuana Index, has about $635,000 in assets. Launched in May 2019 after the run-up in marijuana stocks in anticipation of legalization in October 2018, HMJU’s returns have, unsurprisingly, been terrible. The ETF is down more than 85% annually since inception.

Its bearish sister product, launched at the same time, has fared much better. HMJI has $3.4 million in assets and has returned 27.44% annually since inception.

The closures leave only a few marijuana ETFs in Canada. The Horizons Marijuana Life Sciences ETF (TSX: HMMJ), launched in April 2017, topped $1 billion in assets in 2018. Though assets have fallen to $81.3 million, it’s still by far the largest marijuana ETF in Canada.

The Horizons US Marijuana Index ETF (Cboe Canada: HMUS) has $4.6 million, and the Purpose Marijuana Opportunities Fund (Cboe Canada: MJJ) has $5.6 million.

The third fund closing is the $3.3-million Horizons Active ESG Corporate Bond ETF (TSX: HAEB), launched in September 2021.

CI Global Asset Management, meanwhile, said Friday that it’s streamlining its product lineup by merging 19 mutual funds and ETFs into existing mandates. The terminating ETFs and mutual funds cover a range of strategies including fixed income, value and momentum factors, dividends and corporate class.

CI also filed preliminary prospectuses for two smart beta U.S. equity ETFs that are expected to begin trading in January.

Mark Burgess

News

Mark has been the managing editor of Advisor.ca since 2017. He has been covering business and politics for more than a decade. Email him at markb@newcom.ca.