Global ETF industry set to surge in five years — but not as much as Canada

Noting several tailwind themes, BMO Global Asset Management projects plenty of room for ETFs to grow

Global ETF industry set to surge in five years — but not as much as Canada

BMO Global Asset Management (BMO GAM) has released its annual ETF Outlook Report, which looks at the ETF industry and highlights the trends expected to propel it forward over 2019.

According to the report, the global ETF industry is expected to double from last year’s record high of US$4.7 trillion in assets under management (AUM) to more than US$10 trillion over the next five years. The Canadian industry, which currently has $156 billion, is forecast to grow even faster to $400 billion by 2024.

“Investors look to ETFs as an effective, transparent, low cost asset allocation tool,” noted BMO GAM Global Head of ETFs Kevin Gopaul. “The diversification and trading efficiency that ETFs offer has become more important than ever as volatility has returned to global markets. The value of positioning with traditional passive ETFs and new active ETFs was evident during the market corrections in the fourth quarter.”

The report noted that asset-allocation ETFs, introduced last year, are showing signs of disrupting the industry. Developed in response to conservative, balanced, and growth portfolios traditionally offered by mutual funds, the structure has attracted close to $1 billion in new assets during 2018, which helped Canadian ETFs outpace mutual funds in net flows for the first time since 2009.

Another contributing factor to the reversal of fortunes was volatility from global monetary tightening, rocky geopolitics, and disappointing earnings from leading stocks. “[I]nvestors have turned to ETFs in several ways to navigate the resurgence in market volatility,” the report said. Aside from intra-day ETF trades capitalizing on market mood swings, investors have increasingly turned to ETFs that focus on defensive factors such as low volatility and dividend yield.

And while passive, index-based funds were a primary force behind the rise in ETFs in recent years, BMO GAM noted that active ETF strategies are also growing in popularity amid the turbulence in markets. With fees that typically fall between those of passive ETFs and other active investment products, these vehicles must nonetheless prove their value by delivering performance and differentiating exposures.

That isn’t to say that passive ETFs have become passé, the report emphasised. Rather, investors are learning to use them in concert with active ETFs. Diversification, low cost, trading efficiency, and transparency — the traditional messaging behind passive ETFs — will continue to be core hallmarks in investment. The use of active ETFs as satellite holdings in portfolios will depend on one’s view of the efficiency of asset classes and markets, focus on fees, and combined exposures to enhance risk and return profiles.

Finally, the trend toward short-dated fixed-income ETFs is continuing to gather pace as central banks normalize balance sheets and reduce liquidity. Tactical trading and repositioning within fixed income through the use of ETFs has become a popular strategy.

ETFs have cemented their status as a mainstream investing option, but they still amount to only a tenth of Canada’s mutual-fund industry. That leaves a lot of room for growth in the number of ETF providers and products.

“The increased availability of industry tools and databases, along with the rise in the number of ETF analysts, have helped investors research and improve their portfolios,” Gopaul said. “As investors look to ETFs, there is a greater need for clarity between choices.”


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