Patrick is Managing Director of NBF’s Electronic Trading & Services, offering DEA and algorithmic trading as well as ETF, equity derivatives, and Portfolio Trading to institutional clients.
He has been actively involved in shaping the Canadian regulatory environment and Jobs in ETFs caught up with Patrick in advance of the upcoming ETFGI Global ETFs Insights Summit in Toronto where he will participate in a discussion on regulatory issues impacting trading, market structure, the state of markets and trading best execution.
The biggest factor for near term growth will be the fixed income space. It has been a big factor of growth for both product and assets in the last two years. It has led the way this year for sure and we expect this to accelerate as more investors become comfortable with fixed income ETFs and more differentiated or active products in the space come to market.
Jobs in ETFs: Tell us about yourself and your experience. How did you become Managing Director, Electronic Trading & Services at National Bank Financial?
Patrick McEntyre: I was a trader first – the thinking being when I was coming out of school that the coolest thing in the world was to speak on two phones at the same time:-) I worked on the North American desk of an agency broker that specialized in transition management, so pretty organically I began to focus on portfolio trading and its component pieces, the algo’s and the technology involved. ETF trading has been a natural extension of that.
JiE: Are there particular elements of culture at NBF that drew you to the business and keep you there?
PMcE: Absolutely. The culture at NBF is highly collaborative across business lines & asset classes. As a result there is a very pro-business-development atmosphere, a willingness to try new things that don’t necessarily fit into your traditional box.
JiE Biggest challenge of your career to date and how did you navigate it?
PMcE: Outside of the financial crisis, which was existentially terrifying, I’d have to say the biggest challenge is also an ongoing one – how the role of a broker-dealer and specifically the sales & trading desks is evolving. There has been no single, simple navigation point, but rather an ongoing, constant re-assessment of where value can be added and relevance maintained. It’s not as dramatic as a single crisis to navigate but it really is the biggest challenge we face on an ongoing basis.
JiE: What’s the best bit of advice that you have received in your career and what advice would you give to those who are just starting out in the industry?
PMcE: The best advice I have received has also been the simplest. Be honest, be yourself, know your clients and if you say you will do a thing, do that thing.
As for those just starting out I can relate the advice I got from one of my first bosses when I was initially looking for work in the industry to take on any role you can find that allows for physical proximity to the desk you want to work on. Desks are always understaffed and struggling with resources and they are likely to look to the person they know, who’s nearby and has been consistently demonstrating competence to them on a daily basis, regardless of the actual parameters of their role.
JiE: What are the things you work on, what are some of the challenges that you face in your role and what do you enjoy the most?
PMcE: I spend a lot of time on education both externally with clients and internally with fellow stakeholders in the firm. Whether I’m wearing my ETF hat or my electronic trading or portfolio trading, it’s a regular challenge to keep everyone up to speed on what’s new and where that new thing is going. I like this part quite a bit. Newness is, almost by definition, interesting plus I really enjoy speaking with people, so it’s a pretty good match.
JiE: It’s not that long ago that trading was not electronic. What does the continued evolution of trading look like?
PMcE: I think we’ll see the differentiation between electronic trading and “regular” trading disappear – the electronic aspect will simply become part of the environment in which we all work. No one notices their telephones any more and I think pretty soon nobody will notice their electronic trading tools. As these electronic tools become normal, the focus will return to the quality and effort of the humans operating them. The more traditional values of honestly, candidness, knowing-your-client, and keeping your promises will become more apparent.
JiE: How are Canadian institutional investors using ETFs?
PMcE: Canadian institutional adoption of ETFs differs between equity investors and fixed income investors. In our experience, just about all institutional equity investors in Canada have used an ETF in some fashion, so we attribute 100% adoption rate there. We estimate however that the fixed income community is at a much earlier stage on the adoption curve – a little less than half of those institutional managers are using ETFs.
Generally speaking, investors initially use ETFs for equitization or a liquidity sleeve – equitization being just the idea of gaining access to the exposure of an asset class without actually investing in that asset class directly, liquidity sleeve managing cash flows with the same notion that you’re getting exposure to the underlying benchmark. As they become comfortable with the ETF as a tool to achieve this equitization or liquidity, we’ve seen portfolio managers quickly start to use them to tweak their portfolio tilts and generally express more nimble investment theses – think factor tilts and the like here, slightly changing the duration in a fixed income portfolio.
What really impresses us as ETF traders and ETF practitioners is when we see PMs find new uses for these tools that they originally brought on for equitization – there are inevitably things that we’ve never thought of on our own. We spend time educating folks on how to use the tools but we’ve consistently been impressed with the ideas that the PMs come up with on their own.
JiE: We often hear that Canada and the US, though neighbouring countries, are very different ETF markets. Can you share some of the key differences?
PMcE: Liquidity provision in ETFs would be a pretty big difference between Canada and the US. Liquidity provision in ETFs in Canada is still primarily offered by bank owned dealers like ourselves, rather than independent market makers who make up the bulk of US ETF liquidity. This leads to a rather different ecosystem here where issuers source both the market making and a lot of distribution help from the same partners. That’s quite different from the US where the market makers are independent and just focus on liquidity provision and the ETF providers have to seek elsewhere for help in the distribution channels, help in the wealth channels. We feel that being able to find that primary partnership in one place enforces much better behaviour and much more cooperative behaviour from both sides of the relationship.
As for ETFs themselves in Canada, one of the key differences that we talk about a lot is the availability of actively managed ETFs. These actively managed portfolios in the ETF structure still represent roughly 24% of the assets, but over 40% of the issues in Canada are actively managed, depending on your definition of active. This is poised to grow as a goodly portion of the new product we see in the pipeline looks to be active as well.
JiE: Where do you see future ETF growth coming from in Canada?
PMcE: We still feel that the biggest factor for near term growth will be the fixed income space. It has been a big factor of growth for both product and assets in the last two years. It has led the way this year for sure and we expect this to accelerate as more investors become comfortable with fixed income ETFs and more differentiated or active products in the space come to market.
JiE: What trends do you think are going to define the next few years in the ETF industry?
PMcE: In the Canadian context consolidation is a trend that we can expect. We have 35 ETF providers in Canada, of which the top five make up almost 90% of AUM. We have to think there’s going to be some consolidation outside of those top five, if not some attrition.
JiE: Your biggest concern for ETFs?
PMcE: Profitability and reaching scale are a big concern for many of the new providers, and I’d include in the category of new providers independent shops, mutual fund companies and investment counsellor shops that are expanding into ETFs. To reach profitability in these suites and reach the scale where they can really grow properly is going to be a challenge.
In the growing active ETF space there’s certainly a little more margin to play with, but it’s still a struggle to achieve the mass required to support these business lines.
JiE: Tell us about some of the biggest challenges you see for ETFs moving forward.
PMcE: Especially as the underlying strategies become more complex, it will be a challenge for ETF providers to educate their clients on their products. They face the struggle to un-tie the association many investors still have between ETFs and passive investing. Then they will have the perhaps more difficult job of explaining what their active strategies do.
JiE: If you had to give one piece of advice to the ETF industry looking forward into the next 5 years what would that be?
PMcE: In the advice game, I like to keep things simple and if you really just boil down what we’re trying to do here, I think it’s important for the firms to look inward and remember that ultimately it’s about strong investment management and returns through disciplined, repeatable process. These things are always more important than the package in which these investment returns are delivered. Focus on the product and not so much on the box that the product’s delivered in.
JiE: If you had a super-power, what one thing would you change in the ETF industry?
PMcE: It’s not terribly romantic, but I would conjure better tracking in ETF sales and distribution. It’s well known, certainly in Canada, that while it’s very easy for a mutual fund company to be able to measure and tell who owns their mutual funds and where they are, it’s actually quite difficult in the ETF business to be able to measure where the ETFs have been distributed, who owns them and sold them. While it’s mundane, it’s a remarkable hurdle to the ETF distribution business into wealth channels that it’s so difficult to track these sales and then subsequently so difficult to reward and incentivise sales people appropriately.
If I could fix that with a wave of wand, we’d see an immediate uptick in the success of many of these ETFs seeking scale.
JiE: You will be speaking at the upcoming ETFGI Global ETFs Insights Summit December 2 at the St. Regis. Tell us a bit about that without giving away the session.
PMcE: I’m very excited and looking forward to the discussion. Jos Schmitt who heads up the NEO Exchange here in Canada, is moderating and it will be a wide ranging discussion.
On the market structure side we’re going to be focused on hot topics in Canada – broker internalisation and how retail desks are matching up in the market.
We’ll touch on an ongoing discussion that we’ve been having around optimising the Market-on-Close. As we see ETFs grow in prominence in the institutional community and ETF managers grow in assets, we’re seeing more and more focus on the Market-on-Close function on both the NEO and the Toronto Stock Exchange and I expect it will have a good discussion about what the best way to drive that forward is.
We’ll also look at the evolving landscape of Canadian market making. As I mentioned, it is quite different from the US and especially with the growth of actively managed ETFs there have been fresh challenges for the Canadian community and it will be interesting to talk about how we’re all managing those.
JiE: Staying happy and positive at work – any secrets you can share?
PMcE: At NBF we hire for culture and chemistry first and everything else is a close and important second. We believe that a group that works together will be happier, more productive and more likely to stick around for a long time. For me personally, being happy at work is deeply related to how much I like the people on my team, how well we communicate and how we enjoy each other’s successes. To me, those are paramount to staying happy with one’s role in a complex organisation like the bank.
JiE: What is work-life balance for you and how do you achieve it?
PMcE: This is a much deeper mystery and I think worthy of ongoing study:-) Part of the magic of the mobile technology that we’re all addicted to is that it untethers us from our desks, allowing us to essentially work anywhere, a privilege that I’ve enjoyed over the years, but it also means that we’re working nearly constantly.
If one can manage to draw clear lines around the work phone, about when to use it and when not to use it, about how to prioritise it, if we could draw clean lines around the use of mobile technology, that’s a pretty crucial step towards maintaining a healthy balance.