Growth still the watchword for Canadian ETFs

Amid unprecedented growth, the Canadian ETF Association is holding firm in its mission to make more advisors and investors aware of the benefits of ETFs

Growth still the watchword for Canadian ETFs

The Canadian ETF industry had another banner year in 2020, beating mutual fund flows for the third consecutive year. The COVID-19 pandemic forced advisors and investors took a hard look at their investments to evaluate what they could or should do. As more advisors are becoming fee-based and more investors are realizing the benefits of ETFs, the investment vehicle’s popularity is soaring.  

“ETFs are becoming more of a product of choice than in past years,” says Pat Dunwoody, executive director of the Canadian ETF Association (CETFA). “When you read some of the articles – and there are a ton that are not product-specific, which is different than other investment products – they talk about ETFs and why you should invest in one sector over another. That is appealing to both investors and advisors.”

While growth is nothing new for the industry, Dunwoody believes more investors have begun asking their advisors about ETFs. With many advisors offering or considering a fee-based model, ETFs are also becoming part of the normal shelf.

“For advisors, being able to articulate their value proposition with ETFs is easy,” Dunwoody says. “When they show their client the fee line in a fee-based account, the number usually isn’t that high, and it is easy to explain the value proposition for it. What we have seen with our investor research is people who are investing in ETFs want to understand what they are investing in at a higher level. A lot of ETFs are easy to explain, so it is easy for a client to get their head around them.” 

The time is now for ETFs, Dunwoody adds – given the availability of information, variety of products and low cost of the investment vehicle, investors and advisors are seeing why it makes sense.  

“Even when you add in the other costs to hold an ETF, it is still less expensive,” she says, “and I think advisors and investors are able to see that the lack of compounding of the MER on their investment has a huge impact in 10 or 15 years. They are doing the math – advisors are still able to get paid for the work they do, probably the same or potentially more, and the clients end up with more money invested in the end because of lack of compounding.” 

Dunwoody adds that there is also a newfound comfort level being associated with the ETF industry. Despite being around for 30 years, ETFs have only gained significant momentum in the last six or seven. But that track record, along with the fact that all major banks and fund providers have an ETF shelf, has made advisors increasingly comfortable with the products. 

In 2020, the ETF space was a tale of two asset classes. The year began with fixed income ETFs carrying over their momentum from 2019. Yet as the pandemic took hold, equities began seeing the majority of flows, something Dunwoody believes will continue.  

“People are still going to have fixed income products to balance their portfolio, but with the rates as low as they are, I think you want to skew to equities,” she says. “There are so many niche products coming out that a lot of people are taking a small part of their portfolios and being able to invest in creative products.”

While Dunwoody is unsure whether the ETF space will continue to see more niche products from new Canadian issuers (due in part to the costs), she does know some US providers have been eyeing the Canadian market, and that could be their way in.  

Another initiative the industry has been working toward is to allow MFDA dealers to offer ETFs, which would be monumental for the industry. 

“It could be huge – you are basically doubling the size of the advisor base if they have access,” Dunwoody says. “We have been struggling with this for five years. There were some MFDA firms that launched last year – slowly, just to make sure they were comfortable with the process. I know three are launching this quarter, and I think once we get to 10 of the major firms selling, it will make the other firms evaluate their value proposition and ask if they can afford not to offer ETFs.” 

Dunwoody adds that the upcoming client reform rules will force many fund companies to evaluate their product shelf and realize that ETFs need to be there going forward. She adds that one of CETFA’s initiatives going forward is to support MFDA dealers that are beginning to offer ETFs.  

“We know instituting a new product line is difficult,” she says. “They’ll bring providers in to assist, but it is easier to reach out to us because they know we are product-neutral.” 

CETFA has a few other initiatives on the go this year, all geared at expanding education and information about the industry, which will get a big push on social media to help with product awareness. The organization also plans to launch an ETF screener on its website.  

“It ties in with product choice and how advisors select funds,” Dunwoody explains. “We will have every ETF in the industry on the screener and allow advisors or clients to see all the products that match their criteria. They can get a list and take a hard look at the products that meet the criteria. Then they can do a deeper dive or make the appropriate choice.” 

In addition, CETFA will continue its high-level research into why people are selling or shying away from ETFs so it can get the right information about the vehicle into their hands. Also in the works is an in-depth ETF guide, scheduled to be released later this quarter, that gets into the technical nature of setting up an ETF, what the industry looks like, and in-depth tax and legal information.  

All of these initiatives will ultimately aid in supporting the industry’s growth, which Dunwoody expects will continue.  

“When you look at the growth charts, it is straight up, and we don’t see that changing,” she says. “Part of our discussions internally are making sure the industry’s infrastructure can handle the growth. Whether we are peeling away from the mutual fund product line, I don’t know yet. I think we are entering into that world. The last couple of years has been a lot of new money going into ETFs, but I think we are going to start seeing money transferring into ETFs as people get more comfortable.”