Monday, September 30, 2013

More New ETFs in Canada

The explosion in exchange-traded funds (ETFs) in Canada continues with the launch of five new funds in September by Purpose Investments. I had the pleasure of talking to Som Seif (CEO) and Ross Neilson (Vice President, Sales) over dinner recently to get their take on where Purpose fits in the investing landscape. (Disclosure: Som paid for my dinner, but if you think that affects what I write, you should see how many times per week I turn down offers of far more than the cost of a dinner to place “guest” posts on my blog that masquerade as real content.)

Som Seif is a very smart, high-energy guy who started Claymore back in 2005 and now runs Purpose Investments. Ross Neilson is no slouch himself, but even he tends to sit back and watch Seif go. Som shows passion and communicates clearly in a way that I think is likely to resonate with a significant fraction of investors who hear him speak. I don’t know how his funds will perform, but I wouldn’t bet against Purpose Investments as a business.

The funds offered by Purpose all use purely mechanical strategies to take human emotions out of the equation. However, these strategies are far more elaborate than the fundamental indexing used in some Claymore products. For example, the Purpose Tactical Hedged Equity Fund (PHE) invests in North American equities, but at any given time it hedges away between 25% and 75% of the market exposure. The choice of equities and percentage of hedging are all rules-based to avoid any problems with letting people make gut-based decisions.

An interesting feature of Purpose funds is that they are available as ETFs or mutual funds. The management expenses are the same for the ETF and Series F mutual fund versions. There is also a Series A mutual fund version of each fund that charges an extra 1% per year to pay trailers to financial advisors. Compared to typical mutual funds that pay trailers, Purpose funds are quite cheap. For example, the Series A version of PHE charges 1.8% per year in management fees (the MER is a little higher). However, the management fee on the ETF version of PHE is 0.8% per year, which is high compared to an index ETF like XIU. So it’s a matter of taste whether you think of Purpose funds as cheap compared to other active mutual funds or expensive compared to other ETFs that are based on purely mechanical rules.

The mechanical strategies Purpose uses test well on past market data, but only time will tell how well the funds perform in the future. It’s hard not to get caught up in the excitement when Som speaks. But, my rational side tells me that the professional investors who dominate today’s markets know about the mechanical strategies Purpose is using. For Purpose to beat the market, they have to take money away from some very smart money managers.

One of the smart things Nassim Taleb said in his Antifragile book is that you shouldn’t pay any attention to what people say about investments but watch where they bet their own money. So, maybe you should ignore everything else I’ve said and focus on the fact that I have no plans currently to invest in Purpose funds.


  1. Ah, dinner's not good enough, eh? Holding out for the ring. Wise.

    It's interesting to see the names ETF and financial companies coin: Steadyhand; Purpose etc. Sure beats Blackrock, which always sounds like a coal mine to me!

    1. @Bet Crooks: I think they say "urban rock" in polite company now.

  2. I feel like I'm being hypnotized when Som speaks. It's hard not to get caught up in his excitement, but I think your assessment is correct: it's unlikely that they have an informational/technological edge worth paying more for.

  3. good analysis, Mike.