At 30 years old, Canadian ETF industry hasn't peaked yet

With growth in popularity and choice over the past 10 years, Mackenzie Investments' Michael Cooke sees bright future

At 30 years old, Canadian ETF industry hasn't peaked yet

If measures of net inflows and asset growth in recent years are any indication, it might seem that the ETF is the investment vehicle of the future, and it’s only a matter of time before they dominate the investment fund world. But Michael Cooke doesn’t see it that way.

“I think after 30 years of existence, ETFs are taking a rightful place alongside mutual funds and other investment products as a vehicle of choice for investors,” said the senior vice president and head of Exchange Traded Funds at Mackenzie Investments.

That’s certainly hard to deny as participants across the spectrum, from individual investors to financial advisors and institutions, commingle their assets in the same investment vehicles.

“In retail segments, investors are finding them to be a useful substitute for having to pick individual stocks and bonds. Institutions might be using ETFs in place of derivatives such as futures and options,” Cooke said. “So I see a very bright future ahead for the Canadian and global ETF industry.”

Over the past few years, core solutions have been the most popular categories of ETF products. But with the continued growth and maturation of the ETF space, more product types have emerged to let investors execute more granular exposures. One example, Cooke said, is the suite of active fixed-income ETFs his firm launched in April 2016.

“We felt they filled an important gap in the Canadian marketplace,” he said. “Liquidity isn’t what it once was in fixed income, and cost has become an important consideration in the face of lower interest rates and yields. So bond ETFs have been a valuable complement to people’s core portfolios, and I think we’ll see the applications of ETFs broadening out further.”

Aside from combining the tradability of the stock with easy diversification similar to that offered by mutual funds, ETFs offer low cost that appeals to many fee-conscious investors. The ability to move tactically to navigate through financial markets is another benefit for opportunistic traders, particularly those looking for intraday liquidity. Other investors, meanwhile, would be more partial to asset-allocation solutions that pursue specific objectives, for which ETFs can prove to be efficient building blocks that can be mixed and matched as appropriate.

One other factor affecting choice, noted Cooke, is a preference for homegrown investment products. Compared to their peers abroad, Canadian asset managers are more attuned to the local investment culture and the regulatory environment, as well as withholding tax considerations for certain types of accounts. That puts Canadian managers in prime position to build solutions that fit domestic investors’ needs — and they’re delivering.

“Ten years ago, we didn’t have the same amount of choice in terms of Canadian-listed ETFs, forcing many Canadian investors to go south of the border for their desired exposures or price points,” Cooke said. “That’s changed dramatically.”

With a greater breadth of products, surging asset levels, and greater popularity, the growth of the ETF industry has certainly seemed unstoppable over the past decade. But in the face of massive volatility and deep losses caused by the ongoing coronavirus crisis, some critics might question the soundness of the global ETF market.

But to Cooke, it’s all just history repeating. “We’ve just passed the 30th anniversary of the global ETF industry,” he said. “And during that time, we had the technology boom-bust in 2000, and the Great Financial Crisis in 2008. We’ve also had other market disruptions, flash crashes, and liquidity events in the intervening years.

“The coronavirus is the latest in a long series of stress tests over time, and I think this is one more chance to show the resilience of the global ETF market now supported by a wide network of sophisticated market participants, robust technology, and regulatory oversight.”


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