Why Canada's ETF industry hasn't peaked yet

The country’s ETF space is at a tipping point for even greater expansion

Why Canada's ETF industry hasn't peaked yet

When it comes to success stories, the idea of protracted disappointment followed by explosive growth is almost a cliché. Canada’s ETF marketplace might fall within that category, but that doesn’t dampen the excitement that observers and insiders feel when elaborating on the space’s history — as well as its future.

“[In 2018,] Canadian ETFs outsold mutual funds for the first time in 10 years, helping ETFs capture 10% of total investment fund assets,” reported ETF.com. The Canadian ETF Association (CETFA) documented some US$20.9 billion in net creations for ETFs last year, making it the second best-selling year for the industry.

According to industry participants, the one-tenth slice of investment-fund assets accounted for by ETFs is only the beginning. Kevin Gopaul, global head of ETFs at BMO Global Asset Management, reportedly sees a path toward 25% of investment funds and ETFs, with the added conviction that Canada “is growing to faster than many jurisdictions in the world” given the quick increase in level of adaptation among investors.

That quick adaptation came after a nearly 20-year period of disinterest. While Canada introduced the world to ETFs in 1990, the innovative products languished in the country’s investment-fund space. CETFA Executive Director Pat Dunwoody attributed the initial lack of growth to the original commission-based compensation model among advisors, as well as the prevalence of bank-issued mutual funds in distribution.

But that changed during the 2008-2009 global financial crisis, which Gopaul believes was when some investors woke up to the transparency, easy implementation, low cost, and varied investment offerings made possible by ETFs’ passive index structure. “When the financial crisis hit, and beyond, is when we started seeing a lot of flows into the ETF marketplace—tremendous flows,” he told ETF.com.

Size constraints also vanished over time; the first decade of ETFs’ existence saw only two issuers in Canada, compared to today’s space with 701 ETFs across 36 ETF sponsors, according to CETFA. Aside from helping increase the number and level of innovation of ETF products, as noted by Forstrong Director of ETF Research Karen Tsang, the increase in participants led to a blossoming of educational programs that raised industry visibility and awareness.

“I think there was a huge waterfall effect for all ETF providers simply based on ETF education that was taking place,” agreed Horizons ETFs CEO Steve Hawkins.

Another major tailwind for today’s industry is Canada’s five biggest banks, which Gopaul said were initially concerned that ETFs would cannibalize their mutual fund business. Eventually the reconsidered, seeing ETFs as a way to broaden sales opportunities through their already-existing distribution networks.

A number of other factors are also playing a role in the continuing advance of Canadian ETFs. Canadian institutions are global leaders in integrating ETFs into their portfolios, as the 2017 Greenwich Associates Canadian Exchange-Traded Funds Study found them allocating an average of 18.8% of total assets to ETFs — higher than their peers in four other regional markets. Tsang also pointed to the propagation of robo-advisors, as well as the shift toward transparency in compensation among financial advisors, as drivers of ETF growth.


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