Innovation in the ETF Ecosystem

ETFs in Canada have come along way over the past five years. They are a vital part of the portfolio construction process for many investors and their popularity continues to grow, with record inflows of $40 billion in 2020. 

Investors love that ETFs provide access to over 1000 different strategies within the Canadian marketplace, as well as structural benefits such as daily transparency. Buying an ETF means you can see the holdings of the fund, as well as trading statistics such as daily volume and on-exchange intraday quotes right throughout the trading day. It’s somewhat counterintuitive, however, that this transparency can often hurt the perception of an ETF’s liquidity. 

ETFs offer investors the ability to trade throughout the day in a clear and transparent manner. But what happens if an ETF trades in the morning, but not in the afternoon, or not in the final 15 minutes of the day? This can lead to a material difference between the last traded price and the ETF’s official NAV. 

A new innovation for intra-day trading that I’m quite excited about is the ETF closing-price mechanism that has been launched by the NEO Exchange. This will help with an ETF’s closing price to be more in line with end-of-day quotes, even if there are no trades at the end of the day. 

Using this mechanism, ETFs that have high volumes and trade throughout the day will have the last-traded price used as the closing price, as was previously the case. The real difference comes with ETFs that do not trade as frequently, and here the closing price will be determined using a time-weighted average of the midpoint of the bid/ask spread over the last fifteen minutes of the trading day.

I think this is an important step for the ETF industry in Canada and will bring us more in line with best practices from other global exchanges. I’m also glad to see the TSX propose their own closing price methodology too.

At Franklin Templeton, we will be migrating four of our passive ETFs to the NEO Exchange on March 4th and we are excited about the move and how the closing-price mechanism can improve transparency for investors.

The ETFs making the move are:

Franklin FTSE Canada All Cap Index ETF (FLCD)

Franklin FTSE Europe ex U.K. Index ETF (FLUR)

Franklin FTSE Japan Index ETF (FLJA)

Franklin FTSE U.S. Index ETF (FLAM)