Announcements in the ETF world are mostly tedious these days—usually they involve the launch of another exotic and increasingly narrow new product. That’s why yesterday’s announcement that BlackRock is buying Claymore Investments was a shocker. I’m not the only one who didn’t see that coming.
BlackRock, of course, is the parent company of iShares, the largest ETF provider in Canada, with about $29 billion in assets—about 75% of the market. Claymore’s family of ETFs and closed-end funds currently have about $7 billion under management. Together, the two families will be a powerhouse in the ETF space in this country.
It’s way too early to tell what this will mean for Canadian investors, but overall I expect it will be a positive development. I’ve always liked Claymore’s entrepreneurial spirit and its desire to innovate. For example, the company was the first to create preauthorized contribution plans that allow investors to add money to their holdings each month without incurring trading commissions. Their recent partnership with Scotia iTrade—which makes all Claymore ETFs available with no brokerage commissions—was also a game changer that prompted Qtrade to follow suit. (Claymore’s DRIP program, in my opinion, was not as innovative or as significant as often believed.)
But as refreshing a presence as Claymore has been, I think BlackRock will take them to the next level. The iShares products are probably the most prudently managed ETFs in the country, with consistently low tracking errors, even when the funds are small. I’ve also found them to be among the most transparent and straightforward firms to deal with as a journalist. The Claymore ETFs are now in good hands.
In some ways, the two ETF families are unlikely allies. iShares was among the pioneers in the industry more than a decade ago, and they’ve remained steadfast in their position that traditional indexing—plain vanilla, cap-weighted funds that track third-party benchmarks—is still the best solution for investors. Claymore, on the other hand, has been a vocal critic of cap-weighting and the leading Canadian proponent of RAFI fundamental indexes.
But the ETF industry is changing, and both companies recognize that. Investors already have access to plenty of low-cost traditional index ETFs, so there’s little room for growth in that area. The only way a new player could compete in the traditional ETF space would be to lower fees even more. That’s what Vangaurd has done with its Canadian launch, but they are the only company with the size and influence to pull that off. No one else is going to be able to compete on price.
BMO is competing with superior distribution: they have an army of advisors (most of whom have little or no interest in passive portfolio strategies, by the way) selling their products—and they’re doing that extremely well. RBC looks poised to do the same. Meanwhile, other ETF providers will have to compete with each other by offering more and different product choices.
With that in mind, Claymore and iShares are actually a perfect fit. Although they have 82 ETFs between them, there is almost no overlap. I can’t think of a single ETF that is an obvious candidate to be closed or merged with another as a result of this merger. While many asset classes are covered by both Claymore and iShares products, the funds usually track use very different indexes and strategies.
Index investors will be watching with interest as this one unfolds over the next few months.