Report reviews how Canada's ETF space fared last year, and trends that will carry them forward
While critics have long questioned whether Canadian ETFs’ years-long run of record inflows and AUM increases could survive a period of market stress, the industry’s performance last year should have been enough to dispel their doubts, according to a new report from Mackenzie Investments.
“Not only did ETFs survive, but a record-breaking $41 billion dollars poured into the industry,” the firm said in its inaugural 2021 ETF Outlook Report.
Citing figures from National Bank, Mackenzie said that Canadian-listed ETFs ended 2020 with $257 billion in assets under management, accounting for 12% of all assets in Canadian funds. Canada had become home to 1,010 ETFs, with 39 companies selling ETFs across the country, according to the Canadian ETF Association (CETFA).
More than just staying power, Canadian ETFs demonstrated greater appeal among investors amid the tumult of the markets. “If you look at the history of the ETF industry, periods of increased market volatility have accelerated demand because more people see their relevance,” said Michael Cooke, senior vice-president and head of ETFs at Mackenzie Investments.
Aside from precision and liquidity, Cooke said investors tend to become more cognizant of ETFs’ cost-effectiveness during shaky markets. That’s been borne out by Canadians’ rising fee focus over the past 12 months, which the report said goes beyond buying the cheapest fund. In particular, it said there are many cases where investors are comfortable paying a higher price for differentiated offerings; smart-beta ETFs and active ETFs charge less than the 2% average fee for mutual funds, though they still had higher fees than traditional index-tracking funds.
“More investors are asking themselves: What is this exposure adding to my portfolio and what
am I willing to pay for it?” said Prerna Chandak, vice-president of ETFs at Mackenzie.
Another trend driving the rise of Canadian-listed ETFs, the report said, is the push for specialization. Aside from strategies focused on specific asset classes, investors appeared to express their convictions in certain sectors or themes through the use of ETFs.
Drawing from National Bank data, the report said technology ETFs saw $574 million in flows last year, which represented 75% of their starting AUM. Materials ETFs saw the largest flow with $894 million, an amount equivalent to 61% of their AUM. Energy ETFs, meanwhile, attracted $680 million, which accounted for 69% of AUM.
Digital investing is another tailwind for ETF adoption. Referring to Statista data, the report said Canadian robo-advisors had roughly $11.4 billion in assets in 2020, which is expected to increase further to $24 billion by 2024.
“These tools will play an increasingly meaningful role in Canada, especially over the next decade as more wealth gets transferred to the next generation,” Chandak said.
Even after 30 years of existence, Canadian ETFs are still in their early days, according to Mackenzie. While it said Canada trails the U.S. by roughly five years in terms of market penetration, it said the increase in Canadian-listed funds with a focus on international equity and fixed-income markets has been beneficial for investors who want to avoid the currency fluctuations associated with investing in U.S. dollars as a Canadian.
“If you have a choice between Canadian and US-listed ETFs, you’re better served by choosing the Canadian one,” Cooke said.