COVID-19 couldn't stop Canadian ETFs' momentum

ETF inflows exceeded $40 billion as investors sought specialized exposures and made tactical trades

COVID-19 couldn't stop Canadian ETFs' momentum

Canadian ETFs ended 2019 on a high note, setting a historic record for annual inflows and asset levels. Twelve months and a global pandemic later, the industry outdid itself once again.

According to the latest Canadian ETF flows report from National Bank, Canadian ETFs absorbed $41 billion in annual inflows last year, exceeding their aggregate 2019 record by 49%. ETF volume shot up in the first half of the year as the pandemic prompted a breathtaking selloff that was quickly followed by an impressive market recovery.

And while the full-year record of inflows for mutual funds has yet to be confirmed, it seems their two-year losing record to Canadian ETFs has been extended. By the end of November, ETFs had taken in $37.1 billion, in contrast to just $24.6 billion for mutual funds.

The industry now comprises 1,010 ETFs, representing a cumulative growth rate of 20% over the past 10 years. That includes $257 billion in assets under management across 39 ETF providers.

Equity ETFs saw their largest single recorded year of net inflows with $24 billion, exceeding their previous 2017 high by 54%. The shocks and volatility of 2020 wasn’t enough to shake investors out of their passive proclivities as low-cost, market cap-weighted ETFs continued to lead inflows. Sector and thematic ETFs also sat high on the leaderboard, with technology- and gold-related strategies resonating strongly among investors in the narrative context of COVID-19.

“Thematic equity ETFs had their best year of fund flows,” the report said, noting that ESG ETFs accounted for 91% of thematic equity inflows. “Even though ESG ETFs only occupy 1.5% of total ETF AUM, they represent an outsize 4.6% share of calendar-year net flows.”

There was also apparent disillusionment with respect to low-volatility ETFs, which saw the first year of outflows since the category made its Canadian debut nine years ago. After a few positive months early in 2020, such factor ETFs saw investor redemptions, ending the year with a net outflow of $566 million.

“[L]ow-volatility ETFs suffered large drawdowns together with broad market indices, contradicting some previously held beliefs about how the factor would behave during market stress,” the report said. “At the same time, investors switched into quality factor, value factor, and multi-factor ETFs to participate in the market recovery in a more measured fashion.”

While investors redeemed $1.3 billion across all fixed-income ETF categories – though a single ETF’s institutional creation made high-yield fixed-income ETFs the only net gainer for the month – asset flows reverted to their positive direction in just a few weeks as apparent price discounts to NAV disappeared. “One key takeaway: the underlying bond market (and all of its attendant illiquidity and NAV reporting issues) dictates how fixed-income ETFs trade, not the other way around,” the report said.

Throughout 2020, ETFs with exposure to Canadian aggregate bonds, foreign bonds, and U.S./North America bonds enjoyed strong flows, while cash alternative ETFs saw the highest inflows as a percentage of their starting asset levels among all fixed-income ETF groups (71%).

Gold bullion also shined last year as investors took stock of turbulent equity markets, plunging interest rates, the weakening U.S. dollar, and rising inflation expectations. Gold-bullion ETF flows moved in tandem with the spot price of the yellow metal, according to the report; after peaking in August, those flows moderated and eventually descended into negative territory in the fourth quarter. Still, the annual net inflow record still stood at an impressive $600 million, surpassing its previous high set in 2011.


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