Episode summary
Morley Conn: How Canadian ETFs Actually Work | Rational Reminder 413
The Rational Reminder Podcast
· · 1 hr 19 min · Hosts: Benjamin Felix · Guests: Morley Conn
Summary
The conversation explains how Canadian ETFs actually work behind the scenes, from creation and redemption to market making, block trading, and the roles of issuers, custodians, authorized participants, and dealers. Morley Conn argues that ETF trading is supported by a layered liquidity structure: secondary-market trading between buyers and sellers, dealer inventory, and primary issuance when market makers need new units or want to redeem them against baskets of securities or cash.
A central theme is that ETF liquidity is driven more by the liquidity of the underlying holdings than by the ETF’s own trading volume. Morley Conn says that market makers constantly hedge with baskets, proxies, futures, and other instruments, and that spreads widen when underlying markets are closed, volatile, or expensive to access. He also notes that Canadian ETFs are more retail-driven than U.S. ETFs, while the U.S. market is larger, more active, and more heavily used for derivative-based products.
The episode also covers execution advice for investors: avoid trading when the relevant underlying market is shut, and avoid the first and last 20 to 30 minutes of the trading day. Morley Conn says Canada’s upcoming total cost reporting regime should favor lower-cost ETF products and likely support further ETF inflows.
Key takeaways
- Morley Conn says ETF liquidity is mainly determined by the underlying securities, not the ETF’s visible trading volume.
- Morley Conn says Canadian market makers can create or redeem ETF units using either securities baskets or cash, depending on the situation.
- Morley Conn says ETF bid-ask spreads widen when the underlying market is closed, volatile, or requires a cash adjustment factor of roughly 5 to 25 basis points.
- Morley Conn says retail investors should avoid trading ETFs when the relevant underlying market is on holiday and should avoid the first and last 20 to 30 minutes of the day.
- Morley Conn says Canada’s CRM3 total cost reporting should be a tailwind for ETFs because it will highlight the cost gap versus more expensive products.
Notable quotes
“the liquidity of ETFs is as much driven by the underlying securities than it is anything about the ETF”
“The ETF itself is just a rapper. The underlying securities are what drive that liquidity”
“we load up on a particular ETF we and we're long, we've bought a lot of the product, we might be on the board offering out that product”
“when the US market is on holiday, you should not be trading Canadian Canadian market ETFs who underly the US market”
How the episode opens
This is the Rational Reminder podcast, a weekly reality check on sensible investing and financial decision-making from two Canadians. We're hosted by me, Benjamin Felix, chief investment officer, and Cameron Passmore, chief executive officer at PWL Capital. Welcome to episode 413.
And Ben, I got to thank you because you brought me back to, and I can remember the dinners. I think I've talked about this in episodes years ago, but when we first discovered ETFs back in the mid '90s, and to understand how they work, because understanding how a mutual fund works is very straightforward. Understanding how an ETF works and how much goes on behind the scenes is so fascinating, but so headscratching.
So if you imagine 30 years ago or so where none of this made any sense when you're explaining it we're like creation redemption but how does this happen and I remember I was in uh New York just after 9/11 happened and happened to get a tour of the MX the American Stock Exchange floor and we were watching traders on the floor doing these arbitrage trades
To close the gap with NAB and all of a sudden things started making sense. Of course, Logger Rash has into the NYSC, I think, since then. But it it's just such an unbelievable mechanism. And today's guest, Mley Khan, did a great job explaining so many things that happened behind the scenes. And again, it just brought me back 30 years. It's just wild.
Yep. So, Morley, he's got over 30 years of experience in in sales and trading roles across foreign exchange, money markets, and equities. uh right now he's responsible for sales and strategy in ETF services at Scotia Bank global banking and markets. So we talk about ETF market makers.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- canadian etf mechanics
- authorized participants
- etf liquidity
- block trading
- etf tax efficiency
Companies and tickers mentioned
- BNS
- Bank of Nova Scotia
Watch the episode
Watch “Morley Conn: How Canadian ETFs Actually Work | Rational Reminder 413” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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The Rational Reminder Podcast, this episode and its artwork belong to Benjamin Felix, Cameron Passmore, and Dan Bortolotti. Octagon is not affiliated with the show; this page is an independent summary.
