It’s interesting that a lot of innovation in the ETF space has come out of Canada. We’re like an incubator of ideas before the full rollout of products occurs in the US and globally. Below I discuss some new offerings to this market. They may prove to be clues of similar offerings that could soon appear in your jurisdiction.Up here in Canada, the ETF market is dominated by Barclays Global Investors. Recently BGI rebranded their ETF lineup from iUnits to iShares, similar to their ETF family in the US. DFA has had a presence here as well since 2003. TD Asset Management (a subsidiary of TD Bank) had a short attempt at the industry with a small family of ETFs. With a broad composite, as well as value and growth tilts on it, I thought these funds had a decent shot at building a following. It didn’t happen. My feeling is that the Canadian market is not that big, certainly not big enough to sustain too many ETFs. Still, as we’ve seen globally, ETF investing is gaining significant ground here.

Enter Claymore Investments (“Claymore”), a Canadian subsidiary of the Claymore Group out of Chicago. As I reported on June 20th, Claymore has teamed up with Rob Arnott’s Research Affiliates to bring fundamental indexation to Canada. Claymore now plans on launching 6 new ETFs in the following areas:

· Global Fundamental Indexation

· US Fundamental Indexation

· Japan Fundamental Indexation

· Oil Sands

· BRIC (Brazil Russia India China) and

· Dividend & Income

Like the Canadian Fundamental ETF, the new Claymore ETF FTSE RAFI products have a 65bps MER. The other 3 ETFs have a 60bps MER. Interestingly, Claymore has a 2nd class of ETF called “Advisor Class Units.” This tacks on 75bps as an annual service fee (in Canada, we call it a trailer fee) payable to the client’s advisor. A couple of thought on this fee structure. First, it allows Claymore’s offerings to have broader appeal, at least for those who are involved in selling financial products. Specific to Canada, I remember learning from DFA that their class of funds with similar trailer fees was a new company development tailored for the Canadian market. I believe that the Canadian marketplace is still behind the curve when product developers have to provide incentives to sell their products where such incentives are not required in other jurisdictions.

For global readers, I believe that the significance of the new fundamental weighted ETFs is further proof of the growth of non-market cap indexation. It’s too early to say whether or not fundamental indexation is a fad. Anything can happen, and like TD’s ETFs in Canada, any ETF without a large size of assets under management can quickly be shut down. However, I can only imagine that Rob Arnott as well as the guys from WisdomTree are making their rounds globally trying to spread their wares. The evidence is compelling: Moving away from cap weighted indexation, whether towards Arnott, Siegel or Fama/French, provides better risk-adjusted returns.

Now let’s focus on their last three ETFs. First, the oil sands. I don’t think this one is late to the market but my feeling is that every Canadian already has a position or ten in this sector. BGI Canada has an ETF that tracks the S&P/TSX Energy sub-sector (XEG), has a real track record of about five and a half years and with the usual oil sand majors well represented. Still, it’s true that there is no ETF specifically for the sector. The market will decide if one is needed.

Similarly, BGI has a dividend and income ETF even though it’s only about seven months old. It tracks the Dow Jones Canada Select Dividend Index. Although Claymore’s offering tracks a different underlying index (Mergent’s Canadian Dividend & Income Achievers Index), I’ll be eager to learn what are the overall yield targets and see how historical backtests compare in terms of volatility of returns. I would be surprised to see much difference between the two.

According to my contact at Claymore, this is the first BRIC ETF in the world. A lot of people have been waiting for this. Its planned launch is August 15th. It is based on the ADR’s that trade in the US, which limits liquidity concerns and local market issues. Also, the ADRs are only issued by companies that are regulated by the SEC. This is good in terms of dealing with companies that follow standardized accounting practices but clearly eliminates a lot of companies in these countries. Of interest only to Canadians is that the US$ currency from the ADRs will be hedged to eliminate the FX risk. Of interest to American and other investors is that a US domiciled version should be not too far behind.

The portfolio has roughly 70 holdings. Country breakdown is currently 50% Brazil, 30% China, 15% India, and 5% Russia. Since ETFs already exist for Brazil and China, I would be happier if larger allocations were given to India and Russia.

Industry Breakdown is:

Energy 29.33%

Telecommunication Services 16.28%

Financials 16.17%

Materials 14.91%

Information Technology 9.47%

Industrials 4.36%

Consumer Staples 4.15%

Utilities 3.35%

Consumer Discretionary 1.43%

Health Care 0.55%

My only concern with the BRIC ETF is the same I have with EEM. Another play on the commodity complex?! EEM’s chart looks a lot like that of an energy sector ETF. As time passes, I think I want to be dialing down, not up, on my overall commodity exposure. I’m still completely bullish on commodities, although maybe not like Jim Rogers, but I’m always thinking about how much of my portfolio is “commodity sensitive”, especially considering the flaw of “home bias” and thus how much our clients have in the Canadian market which is nearly 50% energy/materials. The dialing down of commodities may not be happening soon but I am simply cautious now of adding more.

What would really interest me is a product offering that combines the concept of BRIC investing with specific sectors that just make sense for these areas. For example, what about an infrastructure fund investing primarily in the BRIC countries? This would certainly be an actively managed fund so I”ll stop there.

As a professional manager, I’m happy to see the added fundamental weighted ETFs as potential core asset class positions. The BRIC ETF could be a nice add-on to the international equity lineup of EFA/EPP/EEM. However, with the still relatively young Canadian ETF industry, not in terms of years but in terms of assets and trading volumes, I will be somewhat cautious. With increased trading volumes I will become more comfortable in implementing these positions.

But what this industry really needs is greater acceptance of new entrants. This includes Claymore in Canada as well as WisdomTree, ProShares and Powershares in the US. Nothing against BGI, but maybe as an owner/operator of a small shop myself, I cheer for the small guy. BGI certainly has been an innovative provider in the past with new ETFs for more diverse asset classes but it’s the new small providers that have become the new innovators. Are they bringing too many products for the markets? Let the market decide. Some may become a BGI. Some may become a TD.