Despite pandemic-fuelled disruption, Canadian ETFs' popularity and performance continued to shine through
While this year’s COVID-19 pandemic has set off a domino effect of disruption across the global economy and financial markets, a few secular trends from recent years have nonetheless endured. And according to Randall Alberts, senior vice president and head of Distribution Eastern Canada at CI Global Asset Management, that includes the growing popularity of ETFs in Canada.
Alberts noted that despite all the negative headlines, there’s been no single month of negative inflows for Canadian ETFs. For the year up to November 30, inflows into Canada-listed ETFs amounted to $37 billion, surpassing the $28 billion in inflows they saw for the entirety of 2019.
“The endorsement of ETFs by investors was echoed by ETF issuers,” Alberts said, noting how new issuers and innovative mandates have joined the market. “There are now over 39 providers in Canada providing listings of over 1000 ETFs on Canadian markets.”
An appetite for equity exposure among both institutional and retail investors led to $22 billion of year-to-date flows into equity ETFs as of November 30. While the bulk of that went into market cap-weighted strategies, investors continued to show an appetite for diversification into multi-factor, real-asset, and thematic strategies.
“Investors have clearly shown that the transparency, liquidity, and structure of ETFs make them ideally suited to quickly execute on investment themes emerging in capital markets,” Alberts said, citing the rapid deployment of cash into equities through ETFs.
Capital protection continued to be a popular theme among Canadians, with cash alternative ETFs drawing a respectable total of more than $2.2 billion in year-to-date flows. Demand for fixed-income ETFs has also proven durable, with increased demand for global fixed income strategies indicating a need for greater diversification and yield.
“The lower for longer yield environment has investors looking to alternative solutions,” he said. “We’ve seen this with the strong sales of our liquid alternative ETFs, where CI has emerged as the leading provider in Canada with over $2.5 billion in AUM, and we expect investors will continue to have a strong appetite for alternatives moving forward.”
From a sector perspective, Alberts highlighted U.S. Information Technology as this year’s clear top performer, advancing by more than 38% as of December 4. As social distancing measures, anti-COVID business lockdowns, and widespread travel bans took hold, many technology-based and thematic ETFs centred around digitization and innovation have provided handsome profits for investors.
“However, the dispersion of returns in the market was large, and we saw several segments of the market lag,” he said. “For example, the Canadian Energy and Real Estate sectors lagged significantly in 2020, as the uncertainty created by the virus continued to weigh heavily on the sectors.”
Canada-focused ETF strategies’ performance trailed those with exposure to U.S. and international markets; U.S. and emerging-markets were the leading performers. Through a factor lens, Alberts said the low-volatility factor so popular in recent years has struggled to perform as sectors associated with low volatility (such as REITs and Utilities) were negatively impacted by the trends of this year.
“Momentum factor has been the best performing factor in 2020 and has consistently been one of the best-performing factors over the past decade,” he said. “We also saw a resurgence in the value factor late in the year, and any potential vaccine will continue to be a boon for value stocks as we move through the fourth quarter and into 2021.”
Another notable 2020 moment came in March when extreme volatility caused repeated trading drops as well as a marked drop in liquidity across fixed-income markets. As that was happening, the fixed income marketplace in both Canada and the U.S. exhibited unusual dislocations, leading some to question the viability and credibility of ETFs as a trading instrument.
“This issue was not an ETF issue at all, but an issue with the pricing of the underlying bond holdings,” Alberts said, noting how ETFs helped with price discovery and in fact provided liquidity to fixed-income markets. “It illustrated that in challenging markets, ETF prices react to new information more quickly than NAV pricing of traditional mutual funds.”
