Customization and transparency drive ETF boom
For the average investor, ETFs serve as the primary vehicle to access these sophisticated strategies, which were once the sole domain of institutional investors. Torsten Asmus via getty images
On a Canadian investment landscape increasingly defined by a search for lower costs and greater control, exchange-traded funds (ETFs) are cementing their status as the dominant growth engine.
Data from Securities and Investment Management Association (SIMA) and accelerating trends in thematic, alternative and responsible investing all point to a market prioritizing transparency and targeted exposures, pushing ETFs to record-breaking highs.
The latest data from SIMA shows that ETF assets totalled $663.8-billion at the end of September, up by $33.7-billion or 5.3 per cent since August. ETF net sales were $12.4-billion in September.
By comparison, mutual fund assets totalled $2.489-trillion at the end of September, up by $75.6-billion or 3.1 per cent since August. Mutual fund net sales were $3.8-billion in September.
In its 2024 Investment Funds Report published earlier this year, SIMA underscored a year of robust growth, noting that Canadian ETF assets crossed the $500-billion mark, achieving a dramatic 35.5 per cent increase in total assets.
This performance far outpaces the growth in mutual fund assets, which saw a 15.7 per cent increase and $15.2-billion in positive net sales in 2024 – a rebound year, but still dwarfed by the $75-billion in ETF net sales, the highest total ever recorded, according to Eli Yufest, executive director of the Canadian ETF Association (CETFA).
“Lower management fees, intraday liquidity, real-time pricing. Other investment vehicles, mutual funds for example, just can’t match some of the benefits ETFs have for investors. ”
He notes that the number of products available to Canadians has rocketed, from about 10 ETFs a decade ago to over 1,500 today, across every asset class – equity, fixed income, crypto and commodities.
The primary drivers of the ETF boom, according to Mr. Yufest, are straightforward: lower management fees and superior trading flexibility.
“Lower management fees, intraday liquidity, real-time pricing. Other investment vehicles, mutual funds for example, just can’t match some of the benefits ETFs have for investors,” he says.
This combination has made ETFs particularly appealing to a rising class of do-it-yourself (DIY) investors who are bypassing traditional financial advisory channels.
While ETFs clearly dominate the flows, Mr. Yufest doesn’t characterize the trend as “taking over” mutual funds, but rather as a demographic shift.
“ETFs skew from a demographics perspective a little bit younger, and mutual funds, generally speaking, skew a little bit older,” he notes.
As older investors enter retirement and cash in assets, and as younger investors enter the market, the structural shift is expected to continue favouring ETFs.
Beyond the cost structure, contemporary investor trends are feeding directly into the ETF product development cycle. Investors are increasingly demanding thematic and alternative exposure to diversify their portfolios and hedge against market volatility.
For the average investor, ETFs serve as the primary vehicle to access these sophisticated strategies, which were once the sole domain of institutional investors.
For example, Alex Smahtin, portfolio manager and senior analyst at Global X Canada, points to the Chinese ETF market as an option.
“Regulation is becoming more supportive of innovation and putting China at the forefront of AI, EVs and other tech,” says Mr. Smahtin. “Any economy that’s putting time and capital into technology has long-term potential.”
He notes that the Hang Seng TECH Index ETF is a concentrated index of 30 names, “and investing in a passive index in China is still an active decision.”
Another key area of innovation and investor interest has been in the cryptocurrency space. Canada was a pioneer, launching the world’s first Bitcoin ETF.
The long-running passive versus active debate is also finding a new dimension within the ETF structure. While passive funds tracking broad indices remain the largest segment, active ETFs are increasingly popular, giving investors the choice of a fund manager attempting to outperform a benchmark, but often at a lower cost and with the trading flexibility of an ETF.
The market has also responded to the growing DIY segment by innovating with asset allocation ETFs, often dubbed ‘all-in-one’ funds. These products offer a diversified, balanced portfolio – holding a basket of other ETFs – to simplify portfolio construction for retail investors.
Looking ahead, Mr. Yufest predicts a future where the ETF is the default investment vehicle for both retail and institutional investors.
CETFA is actively engaged in education – aimed at retail investors, financial advisors and regulators – to increase the current penetration rate, which is about one in five Canadians.
As Mr. Yufest sees it, the wind is firmly at the ETF industry’s back.
“Expect growth across asset classes, more customized portfolio solutions, wider adoption in the marketplace and innovation – Canada is a leader in innovation,” he says.
Nevertheless, Mr. Yufest cautions against taking the success of the Canadian ETF industry for granted. Increasing competition from U.S. ETFs means the Canadian sector needs to stay competitive, and CETFA is doing its part to help make that happen.
He says the association is committed to working with government, regulators and industry stakeholders to ensure that Canada’s ETF market continues to thrive, remains globally competitive, and delivers long-term value to Canadian investors.
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