On the Money with Dynamic Funds

PARTICIPANTS

Peter Tomiuk
Vice President of ETF Distribution, Dynamic Funds

Alan Green
Vice President and Head of ETFs, Dynamic Funds

Graham MacKenzie
Managing Director, Exchange Trader Product Group

Mark Brisley: You're listening to the ETF Exchange, presented by On the Money with Dynamic Funds. Join us as we dive into the latest trends and investment strategies to help you navigate the ever-evolving landscape of ETFs.

Alan Green: Welcome to ETF Exchange, presented by On The Money with Dynamic Funds. This series will explore the world of exchange-traded funds, where we break down complex financial concepts into easy-to-understand discussions. Join us as we dive into the latest trends, investment strategies to help you navigate the ever-evolving landscape of ETFs. Whether you're a seasoned investor or just getting started, our goal is to provide valuable insights to help you make informed decisions and grow your wealth. Subscribe now for a deep dive into the exciting world of ETFs.

Hello, everyone, my name is Alan Green, your co-host for the ETF Exchange podcast.

Peter Tomiuk: Hello, everyone, my name is Peter Tomiuk, your other co-host. There is no doubt that ETFs have revolutionized the investment landscape since the first one was created right here in Canada back in 1990. They have offered a way for investors to gain exposure to a diversified portfolio through a single security that trades on an exchange. This is so beneficial to investors since it allows one to transact these securities like a stock, but still have the diversification benefits and on many occasions, the active management of a fund. None of this would be possible without the stock exchange.

Alan: That's right, Peter. The stock exchange plays a crucial role in the existence of ETFs. We felt like it would be interesting to delve into how stock exchanges work and what the exchange's role is in the ETF ecosystem. Of course, it's the ET or exchange traded part of ETF, which sets ETFs apart from their mutual fund cousins. Now here to discuss this topic with us today is our guest, Graham MacKenzie.

Graham is a Canadian finance industry veteran of over 25 years. For the past eight years, Graham has been with the TMX Group, where he's currently Managing Director for the Exchange Trader Product Group. Graham, welcome. It's great to have you here. I've known you for many years, but for our listeners, perhaps you could give us a little bit of your background and introduction.

Graham MacKenzie: Yes, thank you very much. I actually started my trading career on the floor of the Toronto Stock Exchange trading options, including options on the original ETFs, the tips and hips, and then got called up one day and was asked to come upstairs and I was told I was going to be trading portfolios of stock. I've got a lot of experience in the inner works of the transactional side of trading from both an institutional perspective, which is where I spent most of my career, but I also at one point ran a retail trading at one of the big five banks prior to joining the TMX Group.

Coming on eight years in my current role is with ETFs and the reason why I sort of landed in this spot was back when I was doing portfolio or program trading, my clients in the business that I was manager were passive investors for the most part. Most of those people evolved into the ETF industry and are seated in the seats around Toronto and across Canada, facilitating the ETF business. That's how I ended up working on the ETF side at the Toronto Stock Exchange TMX Group.

Alan: Being at the TMX Group, I think it's fitting to ask you a few questions about the stock exchange here at home, the TSX. Can you talk to us a little bit about its history, what the function is, how safe it's to do business and the confidence that it instills in investors and so on?

Graham: Yes, absolutely. One of the really important things that an exchange really provides is that there are listing requirements, just as in the same way that you have with funds in prospectuses being filed with corporates that are being approved by the regulators here in Canada, the CSA and the different provincial regulators, the Toronto Stock Exchange and exchanges do some of that along when setting what their policies are to be listed on those marketplaces and on our marketplaces and similar to what we do for stocks, we do for ETFs. For the most part, that is part of the role.

The other role is obviously being able to facilitate the transactions in a central place for where both stocks and ETFs and other exchange traded products can meet. One of the ways in which we do that and why it's a central place for things to happen is by this dissemination of data. We disseminate the data saying, "This is where people are willing to buy. This is the price point where people are willing to sell." The distribution of that data essentially allows for people to come into the marketplace and start putting their bids, putting their offers to where they'll sell. That's one of the central portions.

I think really to give you some sense of safety and things like that, I think a really good way to describe what an exchange can do is look at the listing of crypto currency products in the sense that people have always had some reservations about buying and selling crypto on different marketplaces. What happened with the crypto ETFs was essentially it was a place where people felt comfortable where they could actually come and buy and sell these things. They knew that there was both an exchange and as well as the regulatory framework that was in place to ensure that the underlying portfolio was secure, that the trading was against counterparties that people could feel comfortable with and are familiar with as far as how they buy and sell stocks and ETFs.

That really is an example of just you take something that a lot of people had a lot of reservations of going to say they're more traditional markets and gave access to them somewhere where they actually feel secure and comfortable trading on. Not to say that we're talking about whether it's the validity or comfort of the volatility that can be associated with that. We're talking about the infrastructure that's available through an exchange. People felt comfortable with the facility at that point.

Alan: That's funny, Graham. I thought you might mention the over a hundred-year history of the exchange, but we jumped straight in with crypto and right up to date, which is pretty interesting. I agree with what you're saying there that it's really a very safe place to do business. Again, stock exchanges have that clearing infrastructure behind the scenes as well.

Graham: I think it's important to really talk about the safety that we're talking about right now is really about the infrastructure and there's going to be risk associated with everything that's listed on the marketplace and risk is-- that's where the reward comes from is your tolerance with dealing with risk. There are certainly risky assets that are traded on an exchange and wrapped in an ETF and such, but the safety is in the sense that the infrastructure is there.

Alan: Maybe keep bringing ETFs into the conversation, maybe we'll start with how many ETFs do you have listed on the TMX at the moment?

Graham: On the Toronto Stock Exchange, there are essentially a thousand ETFs listed. We crossed a thousand in January. We should be north of a thousand, but there has been a few that have, let's say, culled, that have merged with others and such. That number could be plus or minus one or two from a thousand, but we crossed the thousand threshold earlier this year.

Frequently you'll hear that there's more than a thousand are available here in Canada and the difference between that 1000 number and 1300 is that there are multiple versions of the same ETF. From an exchange perspective, we look at the root ticker and say there's a thousand of those, but you can take a look at an S&P 500 product or a product that tracks different U.S. indices or an actively managed fund that's in the U.S. and have a U.S. dollar version and a Canadian dollar version and a hedge version. Each one of those tickers, we sort of say that's roughly 1300. If you take away the unhedged and the hedge versions in the US, that's where that thousand number comes.

Alan: Makes sense. What's your role on those a thousand, let's call it a thousand tickers as a stock exchange?

Graham: Obviously the role is in the matter of having a facility for buyers and sellers and particularly the market makers that are really the glue that holds everything together. We provide the facility, we provide essentially the listing process and all those things, but there are many players also that contribute to that same thing to work. The way we look at things and the way we think about things is, yes, we have the incumbency of being a stock exchange that allow for ETFs to trade on. We're really in this game from a long-term perspective in helping facilitate and grow this industry. We think it's an excellent solution for Canadian investors and investors looking to invest in Canada.

Therefore, we see our role as much more about helping facilitate the growth of the ETF, helping facilitate the education of the use of ETFs and trying to grow the industry. No, in reality, our role is utility to help service, to facilitate the trading and the listing of these products. We obviously have a role as a clearinghouse for these. We have a role for those products that have options eligibility on our MX exchange where people can write, buy and call options or write puts or buy and sell those options. We're also engaged in dissemination and distribution of data for these things. There's many roles we play.

Alan: We'll get on to the role of the growth in a minute because I know you made a big strategic investment. We definitely wanted to ask about that and how maybe that fits into a longer-term strategy. You mentioned an interesting term and that's a clearinghouse. I wonder if you could touch on that because to me, when I think about the stock exchange, I think that's safety, bringing the buyers and sellers together to do a trade. Most people leave it there. I'm just curious if you could talk a little bit about what the clearinghouse does and how it ensures that those transactions are cleared and settled appropriately?

Graham: Yes, sure. I'll be honest with you. I've always had a front office role in the capital markets industry and so the back office and the clearing side of things, although I functionally know what I had to do to get things to clear and ensure trade settled, it's not my area of expertise. The rule essentially is there is a centralized clearing of the transaction so that if you're the buyer, then you facilitate by providing the cash to settle the trade.

Instead of going from one dealer, which in many ways is those investment banks or whoever you bought and sold your stocks through or your ETFs, they're the ones that will go to the clearing house and then the seller would be doing the exact same thing where they would essentially provide the securities, the stocks, or the ETFs into the clearing house to settle. That's the role is essentially a centralized facilitator of the clearing so that you don't have to go and chase down another investment bank or dealer to settle your trade. You can go right to one centralized place.

Alan: I think it's a really important point, which like yourself, I started in the front office right in the clearing house that was a back office. When the credit crisis happened, I strongly believe that was one of the biggest drivers of ETF growth, right? Because if you're facing, say, like the Lehman Brothers on a direct OTC trade, that didn't probably work out very well for you. If you're facing via a clearing house that is centralized and taken care of within the clearing house, you're sort of offsetting that risk to that clearing house. Last time I checked, the clearing house never gone down in history, right? I think it's that safety of the stock exchange that really sets the ETF apart. I think it's a pretty important role that maybe a lot of people don't know.

Graham: It's a very important role and it's also really particularly important when you're looking from a derivative side and whether you're trading futures and options and the mechanisms that are necessary and the collateral that's necessary to continue to ensure that those trades settle, but it's deficiencies. There's significant changes happening, particularly in Canada, Mexico, and the United States in the coming months with the move to T+1. That's going to be a particularly interesting endeavor in the sense that we in North America are moving to T+1, but other jurisdictions aren't, and that's going to impact ETFs. There's been a lot of work for the last couple of years that have been done.

From an end investor perspective, it will be relatively seamless. Your trades will settle faster than they have ever. Cash will get into your account. There are certainly some impacts to that trading when the underlying portfolio is outside of North America, but that will be absorbed. There will be a cost of carry for those types of trades and thankfully sometime soon down the road that will close and it will be even seamless on a much more global perspective.

Peter: You've touched on data a lot during this conversation, and I might age myself a little bit here, but I remember when I was a kid, I was a numbers guy. I always was in awe by the amount of data we got every single day in the business section of the newspaper, all the stock quotes, all the volume, the price fluctuations. Obviously, all of this is online now, but can you comment on how stock exchanges are invaluable for giving investors some of the necessary information required to make investment decisions?

Graham: I would say the amount of data is just mind boggling. We'll just use ETFs. There's 1,300-ish tickers. Each ticker has multiple buyers and sellers on each side. The underlying portfolios that these, particularly when it's a stock, stocks are moving up and down and that's causing the market maker to readjust their prices and the amount of shares they want. All those are messages that are happening.

Every time someone moves their price from $10 to $10.01, those create messages going back and forth on the marketplace, going in and out of the engines and spitting out data downstream for all the vendors and all 20,000 advisors across Canada, everywhere. It creates history. Then that's just the bids and the offers and the amount of units and shares that people are trying to buy.

Then there's the transactions that are happening. If you go in and you buy multiple trades or you end up transacting against five different market makers or five different broker dealers that are selling you that ETF, there could be multiple prints and trades and transaction points. All that leaves footprints and all those footprints then can create some really interesting data to be delved into seeing how different stocks trade, how ETFs trade. There's an entire amount of research that is done from an investment perspective that's out there on trying to read the tape and graphing and charting related to all these types of data.

One of the most important things that as an operator of a marketplace is being able to prepare yourself and have the capacity to deal with surges. You take an example of the early days of the pandemic and every single stock is questioning, what's my future if their clients are not coming and showing up, buying things and trading and all these things are just gone. Therefore, there's just this infinite amount of selling pressure or messages and people deciding to buy, walking away from things, coming in, deciding to sell, back and forth. All those messages are just constantly going through the pipes.

Peter: What you're saying is that the amount of information that you receive now has changed a little bit in the last 30, 40 years?

Graham: Incredibly. My first job from a training perspective was on the floor of the Toronto Stock Exchange trading. There was a printer in our booth, printer would print out the order. Someone rips off the printer, writes a little ticket, someone runs out and that was my job is I'd run out to the post or the square where I would trade, and I'd yell out for a market. Someone would then vocally call out what the market is, and they give you a bid and an offer and then you tell them where you'd buy or sell or what was in your ticket. Yes, and then there was literally someone that would type that conversation in and that would be actually what would be fed out. A lot's changed since then.

Peter: Amazing.

Alan: It sounds like a technology data business. Is that fair to say?

Graham: When I joined the exchange, there was reference that we were a data company. As far as the TMX Group, the holding company, the positioning that the leadership took at that point was really positioning ourselves as a data company. I think we've certainly changed a little in the sense that, I think we value the input in other things that we put around the data as well. I think we've shifted away from just calling ourselves a data company.

Alan: Maybe getting back to the ETFs, you mentioned your one of your primary strategic roles is about growth and helping the ETF industry grow. I'm just wondering if you could talk a little bit about this. You're pretty unique in your position. You sit between the market makers, the issuers, and clients, what are you seeing for growth? I know maybe you could also touch on the acquisition you made. If the listeners didn't see it, the TMX acquired VettaFi, a company based in the US. I'm curious as to really understand what you're seeing in terms of where the industry is growing and how you're helping that grow.

Graham: Yes, for sure. You have these conversations with people that are engaged in this industry, and you have conversations with these people that are either entering it or kicking the tires at launching products. You'll hear these different-- generally there are sports analogies that we're in the first quarter, we're in the early innings. You never hear someone actually refer to it that we're nearing the end. You certainly hear questions of, are there too many products and things along those lines, but then you look at what's in the traditional fund business and you see the number of products that are there.

For example, we refer often to the fund business here in Canada is essentially a $2 trillion business from an AUM perspective. We just surpassed $400 billion in ETFs here in Canada, as far as AUM, it really shows you we're sort of 20% of the way there. If you look at where money is going, new money going into products here in Canada, it was $38 billion, I believe, that went into ETFs last year, net new flows and $57 billion exiting the traditional mutual fund business. That's a $95 billion delta between those two. I think a lot of people then go, "Okay, we are not at a point of saturation. We're not at a point where we're seeing-- we're in the late innings," to use the baseball analogy, "We're not in the fourth quarter. The trajectory is still high as far as AUM use cases."

We do education and we create content, and we work with providers like yourselves to create educational content, sometimes the same content that are talking about how do you buy and sell an ETF? What is an ETF? The reality is every day there are new people that are coming in to buy ETFs for the first time and they're looking for that hand holding to go through that process. There was a study that was done, I think it was from Brown Brothers a year or so ago. They saw the ETF industry globally to hit $30 trillion by 2030. Pricewaterhouse, I believe it was Pricewaterhouse, recently came out with one survey and many respondents were from the Canadian ETF industry and essentially saw $700 billion U.S. AUM, which is just under a billion dollars in AUM by 2028.

Alan: That's doubling the business, right?

Graham: Exactly. Can it continue to grow at this pace? Hard to say. Is it going to continue to grow at 25%? Probably not. There is still a lot of growth and opportunity, so therefore, there are certainly going to be new players that are going to enter this market. They know they have to change their lineup and product shelf to fit where investors and advisors are looking for what vehicle they want to see their product in. Yes, we're bullish on this.

You mentioned VettaFi. We made this acquisition. It was a significant acquisition. It gives us an opportunity to participate in the growth of ETFs beyond the Canadian borders, which is where we were really in a particular in the United States. It's also exciting because for someone that's business is really here in Canada, what we like and what we've seen VettaFi being able to do in the U.S. is really help the ETF providers south of the border and advisors utilize the ETF products and tools there and distribute them in a different way that's been done before.

We think there's a lot of exciting things that have been done by VettaFi in the United States and the impact that they've had in their short lifespan as far as "VettaFi", I put my quotation marks because a lot of these people have strong history in the ETF industry, what they've been able to do south of the border. We really want to start to see that and have an impact here north of the border. We're looking forward to starting to implement some of those VettaFi products here in Canada.

Alan: Thank you, Graham. It's just great to have partners like you and the exchanges, a lot of investment going in and I'm really excited to see what you're going to do with VettaFi and how that's going to help the whole ecosystem. I think it's good for all ETFs. With that, I want to thank all of our listeners. We'll be back again soon with another episode of the ETF Exchange, but for now, thanks, everybody.

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