Richard Kang1

The Defensive Investor's Tool; New Canadian ETFs; Inverse Exposure to Emerging Markets

RS: First, the unfortunate fact is that we Canadians seem to be unconcerned about the fact that fees overall in the financial services industry are higher here than elsewhere in the world. Evidence of this in the fund industry specifically can be found in this paper: papers.ssrn.com/sol3/p...

The portfolio advisor to the Horizon BetaPro products in Canada (both mutual funds and ETFs) is ProFunds out of the US, the same manager of the ProShares family of levered and inverse ETFs.

Yes, the fees for levered/inverse ETFs both in Canada and US are high in relative terms versus other more vanilla, non-levered ETFs for a number of reasons. I would only wonder if investors really care about fees in these cases if it's fair to assume that most investors who use levered/inverse ETFs are only in them for the very short-term. Would investors hold the levered long S&P 500 ETF when they can use something like SPY or a similarly cheap Vanguard fund/ETF? Only the somewhat sophisticated investor who wanted to free up cash for some "portable alpha"-type strategy would consider the levered long fund approach. Perhaps there are a few other similar reasons but not too many I think.

Despite what anyone might think about the relatively high fees, you can't deny that both BetaPro in Canada and ProShares in the US have been successful when you consider their assets under management growth from the inception of their ETF operations. These products are for active investors, not the low-cost, efficient market, Bogle/Malkiel followers. The success of these products, I think, proves that in the ETF space but especially with levered/inverse products, fee sensitivity is not the major issue.