Shifting sands? Future opportunities in ETF space

Utility and infrastructure are shining as thematic and digital currency ETFs fade

Shifting sands? Future opportunities in ETF space

Canada has been a leader in launching exchange-traded funds (ETFs), and recently saw huge inflows, but it’s been reflecting some recent global trends, which is calling on advisors to be more flexible.

WP Advisor Connect’s latest roundtable of three ETF industry leaders spelled out some of these trends when it discussed “Disruption, Innovation & Opportunities: The Future of ETFs”.

The panel began by noting that, while the volatile stock market has entered a period of moderation and correction, and interest rates and inflation are still climbing, the latest ETF numbers are still positive.

The latest Investment Funds Institute of Canada statistics showed there was a $32 billion Canadian ETF net inflow for the first half of 2021. While that dropped to $16 billion in the first half of 2022, it was a stark contrast to the $3.5 billion in net redemptions of mutual funds.

So, what’s coming next?

“We were overdue for some volatility, but maybe not this much,” said Trevor Cummings, vice president of ETF distribution at TD Asset Management Inc.  “What this volatility reminds us of is that you have to build portfolios for your clients that can withstand multiple outcomes because we really don’t know whether inflation has rolled over or whether it persists. You need portfolios that can flourish or prosper or endure under a multiple of different scenarios or different outcomes.”

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Cummings also noted active ETFs have risen in Canada, even more than globally. But, he reminded the audience that the first ETF was Canadian as was the first bond ETF and first currency hedged ETF.

”We really dove into the deep end,” he said, “and I think our respective firms today all have some combination of ETFs that may be tracking index, and are active as well, to give people more options in the ETF industry as we continue to evolve.”

Ahmed Farooq, senior vice president and head of retail ETF distribution for Franklin Templeton, noted there’s also a demographic difference on how younger versus more seasoned advisors construct their portfolios, particularly if the more seasoned ones remember the financial crisis.

Younger advisors, he said, “may have felt a bit more pain just because they haven’t gone through many market cycles, so they may not have trained their clients to think about volatility in the way they should. They may not have taken enough profits or done that systematic rebalancing.

“I think we got a little greedy in our investment choices when the markets were doing too well. So, I think we’re starting to see some of the ETFs that didn’t get the light of day for many years, the value ETFs, start to get the limelight.”

He said that, while advisors were choosing thematic or digital currency ETFs, those have now dropped by 50% to 60%, and utility and infrastructure ETFs are picking up. Fixed income had also dropped by double digits early in the year, but may be back to par by year-end.

“It comes back to asset allocation, staying resilient in terms of how you structure the models in your portfolio, but then also taking some tax loss selling early,” Farooq said. “Maybe we should crystalize early and take advantage of some of the losses we have in the portfolio and try to find similar mandates to take on those positions or even change directions because I think you have the ability to do that, but also maintain those views that you’re trying to express, and you can do it very quickly with an ETF.” 

Darren Gazdag, regional sales director for Emerge Canada Inc., noted that the fund manufacturers are developing many alternatives, and the next leg up could be quite extraordinary.

“This is where active managers are really going to shine,” he said. “This all sets up very well for them as they continue to position their portfolios accordingly. To borrow a phrase, ‘momentum is made, not found’. So, we think this could be a very good opportunity to add or initiate new allocations to equities.”