Exchanges innovate as ETF listings rise

This year’s innovations in ETFs haven’t been only about exotic new products. Along with expanding their listings, the Toronto Stock Exchange and the NEO Exchange have taken action to revise closing-price policies, and have rolled out new information and data services.

Of the two, the TSX lists 836 ETFs as of mid-year, versus almost 100 for NEO. No ETF is listed on both exchanges.

“With a TSX listing, your ETF is available to trade in marketplaces that perhaps some participants prefer to utilize to access the market,” said Graham MacKenzie, head of exchange-traded products with TMX Group Ltd. “So it’s not really necessary to list in multiple markets.”

The TSX executed $275 billion in ETF trades in the six months ended June 30 (compared with $299 billion over the same period in 2020). Meanwhile, NEO had just under $100 billion (compared with $111 billion in 2020), a much larger portion than its share of listings. Other platforms had smaller amounts of trades.

NEO enhanced its reputation as an innovator with new closing-price methodology that’s designed to eliminate stale-dated pricing of low-volume ETFs. Previously, if an ETF had no trades during the day, its closing price would be set at the most recent trade, which could be one or more days earlier.

NEO’s new policy, implemented in March, applies when there are no trades during the last 15 minutes of the day. The closing price is derived from the midpoint between the best bid and offer prices. “This is where competition has had a very clear impact,” said Erik Sloane, chief revenue officer with the NEO Exchange. “It’s something that the Street said we needed. We listened and reacted and built something.”

Toronto-based Franklin Templeton Investments Corp., which lists its ETFs primarily on the TSX, was sufficiently impressed with the NEO initiative to switch four equity index ETFs to NEO. “That was something that we felt was a great innovation,” said Ahmed Farooq, Franklin Templeton’s senior vice-president and head of retail ETF distribution. “I think competition is good, just because it allows both exchanges to be held accountable in helping the marketplace grow and making sure that there’s technologies that are benefiting clients.”

The TSX is planning to implement a similar closing-price methodology; the exchange is making transition arrangements with data vendors and awaiting regulatory approval. “This is going to help the investor in the user experience, with using ETFs,” said MacKenzie. “And we anticipate this will help the adoption and use of ETFs.”

Among the TSX’s other initiatives is the launch in June of its online TSX ETF Investor Centre, enabling investors and advisors to compare TSX-listed ETFs, but not those listed on NEO. Up to three TSX-listed ETFs can be selected for side-by-side comparisons of performance, holdings, fees and other data.

The website also hosts articles, videos and an ETF 101 section with introductory information. “We really strongly believe in the importance of access to information as well as education,” MacKenzie said.

Earlier this year, the TSX joined forces with New York-based ETFLogic to launch the TMX Logicly platform for ETF issuers, advisors, portfolio managers and other industry professionals. Offered by subscription, the service provides more extensive research and analytics than the free-of-charge ETF centre.

As for NEO, along with its new closing-price methodology, the other major ETF initiative this year is making real-time market data available to Mutual Fund Dealers Association of Canada (MFDA) registrants. Announced in June, the more than 5,000 initial participants include reps employed by IG Wealth Management and Sterling Mutuals Inc.

Sloane said NEO provides a cost-effective solution for MFDA advisors who want to expand into ETFs but need access to real-time quotes to place orders for clients. “You need to be looking at the market in order to place your limit orders into it.”

NEO consolidates trading volume from various trading venues, including the TSX, to provide advisors with the entire picture of activity on an ETF for the day, Sloane said. By contrast, TSX quotes reflect only trades carried out on its own exchange. While NEO trades TSX-listed ETFs, the TSX shuns those listed on NEO.

Both exchanges added to their ETF listings in the first half, led by the TSX with 67 new ETFs. “Probably the most visible and most talked about would have been the introduction of cryptocurrency ETFs globally here,” said MacKenzie, pointing to the launches of Purpose Bitcoin ETF and CI Galaxy Ethereum ETF.

MacKenzie also noted the further expansion in thematic ETFs. Examples include the BMO Clean Energy Index ETF and the Harvest Travel & Leisure Index ETF on the TSX, and the Emerge ARK Space Exploration ETF, one of 18 new ETFs launched on NEO in the first half.

Another growth area is ETFs with sustainable and environmental, social and governance (ESG) mandates. “We saw a rounding out of providers’ product shelves to include more sustainable products to meet demand from advisors and investors,” MacKenzie said.

Among those expanding in ESG on the TSX was Toronto-based BlackRock Asset Management Canada Ltd., with three iShares ESG MSCI funds launched in March. The ESG choices available to investors expanded in July, with Toronto-based CIBC Asset Management Inc. launching six sustainable funds on NEO.