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TORONTO (Reuters) - Bank of Montreal (BMO.TO) will gain ground against foreign rivals to capture 10 percent of Canada's exchange traded fund market in 2012 as domestic rivals try to decide whether it is too late to enter the burgeoning ETF space, the bank's head of asset management said in an interview.
Rajiv Silgardo, co-CEO of BMO Global Asset Management, said he expects Canada's C$43 billion ($43 billion) ETF market to continue to grow at a double-digit pace in the next five years as investors look to the low fees and market-matching returns of ETFs to take some of the risk out of their sagging portfolios.
Having set a target of capturing 10 percent of the ETF market within five years of his moving over from Barclays Canada in 2009, Silgardo said BMO - Canada's fourth-largest bank and No. 2 ETF player - is on track to hit that mark two years early.
"As of December, we were at 8.9 percent, and I think we're at 9.3 percent as of end of last month. So we should hit the 10 pct threshold sometime this year," Silgardo said, pointing to BMO's 2009 ETF launch as a success story unmatched by rivals in Canada's small but powerful banking world.
ETFs are funds that track an index, a commodity or a basket of assets but trade like a stock on a stock exchange. That makes them attractive vehicles to profit from the growth of commodity markets, bond indexes or a stock exchange or sector while retaining the liquidity and transparency of an active stock.
Only BMO and Royal Bank of Canada (RY.TO), the nation's largest bank, have entered the ETF space to compete against behemoth foreign rival BlackRock Inc (BLK.N), the world's largest money manager, whose iShares unit snapped up privately held Claymore Investments last month. The takeover of the No. 2 ETF player by the No. 1 boosted iShares' share of the Canadian ETF market to about 85 percent.
While RBC has put little effort into promoting its nascent ETF offerings - fearful perhaps of cannibalizing its successful and more lucrative line of mutual funds - BMO has galloped into the ETF space with a lineup of 44 funds.
The bank's ETF business led the industry in growth in 2011, accounting for C$2.3 billion, or 49 percent, of the growth of assets under management, according to figures released by BMO on Tuesday.
BMO's ETF business more than doubled in 2011 to C$3.8 billion in assets under management, from C$1.5 billion at the start of the year, the bank said.
Canadian ETF assets are expected to more than double to $125 billion by 2020, according to research firm Investor Economics, with about one-third held by institutional investors and two-thirds on the retail side.
Within a few years, Silgardo believes ETFs will represent 20 percent to 25 percent of the Canadian investment pie, up from the current 6-7 percent level, catching up to the rest of the world where the ETF market is more mature.
"We've seen tremendous growth in the last few years, but you don't want to just extrapolate that for the next few years in a straight line because we've grown at 30 percent over the last five years," Silgardo said.
"I don't think (growth) is going to continue like that into the future. But if you grow it at 15 or 16 pct, in another five to seven years I think you can be there."
While competing against wealth management juggernauts like iShares and incoming U.S. powerhouse Vanguard Group, which rolled out a slate of six Canadian ETFs last year, may seem an uphill battle for Toronto-based BMO, Silgardo believes the bank's network of 920 Canadian branches gives it front-line presence rivals cannot match.
Unless Canada's other big banks enter the ETF fray, that is. With the exception of RBC's modest ETF entry, and a failed 2006 bid by Toronto-Dominion Bank (TD.TO) to open the ETF market in Canada, the nation's big lenders have so far watched the ETF battle from the sidelines.
"I think the banks will have to figure out for themselves what they want to do with this product. The thing that will stop them from getting in is they may believe they are a little late getting to the market," said Silgardo, who came to BMO from Barclays, which was later bought by iShares, just as BMO was ready to launch into the ETF space.
"There are only so many ways you can create an index fund ... and the bulk of that has been done. So it is very difficult for (rival banks) to find any white space in that product category," he said.
"The other thing they have to be mindful of is their mutual fund franchise - how do they make it all work? So I think they are watching us. From our perspective I think it has worked really well."
Reporting By Andrea Hopkins; editing by Rob Wilson