The Ontario Securities Commission granted an exemption to two exchange-traded funds (ETFs), Hamilton Canadian Bank Mean Reversion Index ETF (HCA) and Hamilton Enhanced Canadian Bank ETF (HCAL), from the concentration restriction in National Instrument 81-102 Investment Funds (NI 81-102). This decision allows the ETFs to invest a higher percentage of their net asset value in the securities of the six largest Canadian banks than is typically permitted under NI 81-102.
Under NI 81-102, mutual funds are generally restricted from investing more than 10% of their net asset value in securities of any single issuer, with a higher threshold of 20% for alternative mutual funds. The exemption permits HCA to exceed the 10% limit and HCAL to exceed the 20% limit, enabling them to replicate the performance of a rules-based Canadian bank index and a multiple of that index, respectively.
The rationale for the exemption is based on the transparency and passive nature of the ETFs’ investment strategies, which are fully disclosed to investors. The ETFs’ portfolios consist solely of securities from the six largest Canadian banks, which are among the most liquid equity securities listed on the Toronto Stock Exchange. The exemption is conditional upon the ETFs continuing to invest in accordance with their stated investment objectives and strategies, disclosing their rebalance frequency, and including specific risk disclosures in their prospectus.
The decision also revokes and replaces previous decisions (Original Decisions) that granted similar relief to the ETFs, as the index they track is undergoing changes that would render the Original Decisions inapplicable. The ETFs are required to comply with the conditions set forth in the decision to maintain the granted exemption.