'This may be the first of many partnerships in Canada’s $300 billion ETF space,' says VP
In an unusual move that may be the harbinger of things to come, Horizons ETFS has partnered with Hamilton ETFs to launch its new Canadian Utility Services High Dividend ETF.
“We co-developed this product with Hamilton ETFs, which is a competitor, but an industry partner as well, where they’ll be launching a 1.25% version of the same index,” Mark Noble, executive vice president of ETF strategy for Horizons ETFs, told Wealth Professional. “Both of our firms recognize that there’s probably some real value in re-evaluating how you think about utilities.”
Noble noted that Horizons has been interested in utilities for awhile because, historically, they have two major features that make them attractive during these types of market conditions.
First, they have historically had lower volatility during recessionary environments because they’re focused on critical infrastructure, such as electricity, hydro, and gas, which are necessary expenditures.
“During a recessionary environment, people don’t stop paying the things they need. Discretionary spending, such as automobiles, consumer technology, and luxury goods, have decreased spending,” he said. “Utilities tend to maintain their revenue during those periods because they provide services that are critical.”
He noted that utilities may have a pullback during economic downturns, but it’s one of the sectors that holds best during a broader economic decline.
Secondly, utilities are attractive because they pay a fairly strong yield relative to other sectors, and that’s usually in the 3% to 4% range, which he noted “helps as an offset as the market starts to cool off and you start to see growth stocks, such as technology, decline. Utilities have a steadier cash flow that can attract investors.”
Noble said Horizons had a hole in not having a utilities product in its line-up, especially when it saw there’s a bigger demand for income and there’d been a $600 million dollar inflow into utilities ETFS in Canada with the potential of billions of dollars in the U.S.
He noted there are limited Canadian utilities outlets, so this is a “fairly thin market”. But, Canada also has sectors, like telecommunications, that look like utilities. He pointed to the big telephone and internet providers, like Rogers, and large pipeline companies, which Horizons’ product includes.
“By doing that. you create a greater amount of diversification. But, you also substantially increase the income component of those, and we think that they fit more of what we would consider a good Canadian utilities product,” said Noble, adding “it’s representative of the kind of dividend portfolio they would hold outside of the Canadian banks, which is the other major sector that we see in dividend portfolios. So, we thought our product does a really good job of hitting the cross-section of these lower volatile utility service companies that pay attractive dividends.”
Hamilton ETFs has filed a prospectus to do the 1.25% yield product on this index, while Horizons is doing 1%s, and Noble said that both felt the strategy made sense.
“There’s a lot of money with the banks and large bank providers and large ETF providers in Canada. We think that by building a better mousetrap and having a couple of Canada’s leading independents work together on our distribution and marketing efforts, we can probably make a strong case to wrestle some of those assets and interest away from those providers.”
Noble figured it will take six to 12 months for the Horizons ETFs’ product to get traction.
But, he said it was a unique opportunity to work with Hamilton ETFs , which plans to launch in early September. This is Horizons’ first foray into this kind of agreement, but Noble said there may be more opportunities since the Canadian ETF market is well over $300 billion dollars and, “there’s lots of space for independent providers to carve out some interesting partnerships. So, maybe it’s the first of many.”
