Fixed-income and ESG ETFs took flight in 2019

BMO GAM report looks back on industry’s development last year, and outlines trends to watch

Fixed-income and ESG ETFs took flight in 2019

Fixed income and ESG were among the key trends that drove last year’s advance in ETF assets, and more growth is anticipated for the Canadian space in 2020.

In the latest edition of its Annual ETF Outlook report, BMO Global Asset Management (BMO GAM) made note of a continued acceleration in ETF assets, which reached US$6.2 trillion globally and exceeded $200 billion in Canada by the end of 2019.

“Among the 35 ETF providers in Canada the top three, Bank of Montreal (BMO), Vanguard and RBC iShares, retained their strong-hold on the market collectively holding just over 75% of ETF assets in the country,” the report said. “Fees dropped across the industry, as ETF providers push for competitive edges.”

An appetite for safety amid fears of volatility and geopolitical risks helped fixed-income ETFs notch a landslide victory in last year’s net-inflows race. Canadian aggregate bond strategies maintained their status as the most popular fixed-income product in the market, while notable flows went into cash-like fixed income, bond proxy sectors, and gold. Ultra short-term fixed income also earned attention among investors seeking a liquid safety play with a competitive yield.

Low-volatility ETFs emerged as the most popular factor strategy in Canada, absorbing $2.5 billion from risk-shy investors. Liquid alternative public funds have also entered the picture as alternate sources of alpha and diversification: while some asset-gathering has taken place in market-neutral and leveraged-income ETFs, their reactions to the market have yet to be understood by investors, who face increased pressure to fully comprehend the strategies and determine their suitability.

ESG investing also came into increased focus among asset managers and individual investors, driven by a better appreciation of ESG risks’ impact on profitability, growing awareness of possible financial benefits reaped by highly rated companies, and more watchful eyes on companies’ ESG ratings. With Canadian exchanges now listing over 30 core ESG ETFs, most of which were launched in 2019, the need for complete due diligence to distinguish strategies based on their implementation and methodologies has gotten more urgent.

Awareness of asset-allocation ETFs also rose in 2019 as their “set it and forget it” mandates and low fees resonated with investors, particularly do-it-yourself investors. “These ETFs totaled $3 billion in assets among all providers in Canada in 2019,” the report said. “Given the momentum that is building in this space, we expect this brand of ETFs to continue to gather assets as easy to use investment solutions.”

While Canadian ETF market share remains firmly concentrated among a select handful of providers, and the bulk of flows go to well-established ETFs, BMO GAM said it does not foresee a slowdown in the entry of new products or providers.

“We anticipate industry growth to over 1000 ETFs in Canada in 2020, and we expect to eventually see 50 providers in the Canadian market, although newcomers will find it harder to claim open space,” the report said.


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