ETFs
Exchange-traded funds 2020: where they are, where they’re going
ETFs are expected to continue to grow because of their primary investor advantage: fees that started low and have fallen even further with increased competition among providers. istock.com
Without a lot of fanfare, 2018 heralded a sea of change in Canadian investing – for the first time in more than a decade, exchange-traded funds (ETFs) outsold traditional mutual funds among retail investors.
That trend continued through 2019 and into 2020, with an astonishing $34-billion flowing into ETFs this year, as of October 31, 2020. This is despite the Canadian economy coming to a screeching halt with the first pandemic shutdown, and market volatility reflecting the global uncertainty about what COVID-19 meant for our collective future.
As the markets have acclimated to the new normal, the growing presence of ETFs in retail investor portfolios has shown no signs of slowing, says Pat Dunwoody, executive director of the Canadian ETF Association (CETFA). “Initially, ETF investments were largely made by institutions; today, ETFs are the investment vehicle of choice for retail investors as well,” she notes.
Canadian-listed ETF assets have continued to reach new all-time highs, with assets of more than $232-billion, at the end of October 2020.
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In the past five years, we’ve seen the industry grow from just 12 providers to 38 providers, including all the major banks and traditional mutual fund issuers. We’ve gone from 350 ETF listings in Canada to close to 1,000. That’s huge growth.
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The industry has been growing alongside an exponential expansion of ETF product selection.
“It’s been exciting to watch the industry grow in this regard,” says Steve Hawkins, chair of CETFA and CEO of Horizons ETFs Management (Canada) Inc. (Horizons ETFs).
“In the past five years, we’ve seen the industry grow from just 12 providers to 38 providers, including all the major banks and traditional mutual fund issuers. We’ve gone from 350 ETF listings in Canada to close to 1,000. That’s huge growth.”
On Canada’s exchanges, ETFs are making up a larger stake of daily trading activity, says Mr. Hawkins. “Canadian investors today are being empowered by technology, and they’re taking the time to learn how to invest. And ETFs are their tool of choice in this regard.”
With near-zero interest rates making it challenging to stay ahead of inflation with Canadian fixed income investments, more investment dollars are flowing into equity ETFs this year, he says. “Last year, 55 cents of every dollar that went into ETFs went into a fixed income product. We’ve seen a reversal this year, and I think it’s a trend that won’t be going away any time soon.”
Major changes in the global ETF markets include the growth of synthetic ETFs in Europe and active ETFs in the U.S. — trends that were already well established in Canada.
“Within the Canadian regulatory system, we were able to launch our first active ETF over 11 years ago; the same structure has only recently become possible in the U.S.,” says Mr. Hawkins. “We’re seeing more and more active ETFs joining the marketplace here in Canada. I believe asset allocation has changed, and investors are looking for opportunities to rotate their assets in and out of different themes. This is where active ETFs really have an opportunity to grow; they make up the majority of new ETFs being launched in Canada, another trend I believe will continue.”
Horizons ETFs introduced the first synthetic ETF in Canada just over 10 years ago.
“BlackRock is now looking to launch a synthetic ETF in Europe; Invesco already has a large synthetic ETF presence there. We have also seen continuing growth in synthetic ETFs in the U.S.,” reports Mr. Hawkins. “We’re very happy to see this global validation of the structure.”
All this product selection means that, as always, investors can’t overlook their obligations to know what they’re investing in, says Ms. Dunwoody. “As with all investments, it starts with the investor or investor and adviser identifying what’s needed in the portfolio and then choosing the best assets to fulfill those objectives.”
As an asset class, ETFs are expected to continue to grow because of their primary investor advantage – fees that started low and have fallen even further with increased competition among providers.
“ETFs provide exposure to almost every single asset class and sector that mutual funds do. If you can own the same underlying securities for a lower fee, it will have a significant impact on your long-term returns,” says Mr. Hawkins.
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