Why investors' ETF interest will keep accelerating

Cryptocurrency takes the lead, but ESG is 'a force to be reckoned with', says Franklin Templeton Canada VP

Why investors' ETF interest will keep accelerating

After another record-breaking year, Canadian investors’ interest in exchange-traded funds (ETFs) is accelerating, says Franklin Templeton Canada.

“Canadian investors continue to pour money into ETFs. We had another record year of $53 billion inflows,” Bobby Eng, Franklin Templeton Canada’s Senior Vice President and Head of Platform and Institutional ETF Distribution, told Wealth Professional. “Considering we surpassed last year’s record of $41 by billion by $12 billion more, it’s incredible.

“We’re now sitting at more than 1,100 different ETFS traded on Canadian markets, $323 billion worth of total ETF assets, 40 different providers and, last year alone, 202 new products launched in the marketplace. It’s certainly a robust market, and it doesn’t seem to be slowing down anytime soon. In fact, it seems to be accelerating.”

Eng compared that to ten years ago, when there were only 236 ETFs with $34 billion and six ETF providers in the marketplace.

Institutions are also using ETFs, especially for multi-asset class mutual funds as they seek core and tactical exposures in a very cost-effective manner. Eng said Franklin Templeton estimates that $80 to $90 billion of ETF assets are held within institutional mutual funds, and that number has grown steadily over the past five years. About 75% of those assets are held in Canadian ETFs and 25% are held in U.S.-listed ETFs. 

Most of the 2021 flows went into equity ETFs because the equity markets did very well.

Eng noted Canada launched the first ETF in the early 2000s and then the first fixed income ETFs and first currency hedge ETF. Last year, Canada was also the first to launch a crypto-backed ETF, which Eng said was a new investment category “that made a splash in 2021”.

“Here we are again: Canada leading the pack, launching the first crypto ETF. That’s pretty impressive,” he said, noting that, from its February 2021 launch until year-end, it gained $5.9 billion in assets, 34 products, and eight providers.

He said Canada’s trend-setting firsts are due to the Canadian regulatory agencies being a bit more relaxed than the U.S. about launching new products, so Canadian ETF providers can get to the marketplace sooner. The U.S. now has filed crypto-backed ETFs, expected in the market this year.

Eng also attributed ETFs’ phenomenal growth to a more educated marketplace where people now know ETFs have lower costs, trading flexibility, and a vast selection of products, and more comfortable using them. Mutual funds continue to be very expensive in comparison.

“The Canadian marketplace has the highest management fees for mutual funds in all developed markets,” he said. “It’s gone down quite a bit over the past few years, but it’s still pretty high. So, relative to mutual funds, ETFs look like a very attractive product to invest in.”

While it’s hard to predict what the next big trend will be, Eng expects another record-breaking year for inflows and product launches. He thinks that particularly true for ESGs, which was the second key growth area in 2021. Even though ESGs gained $4 billion of inflows in 2021, ESG-related ETFs only comprise 3% of total assets under management. There are now 100 products – passive, active, and thematic – with 40 launched in 2021.

“That’s a force to be reckoned with, as well, and we’re probably going to see more ESG-related products coming to the marketplace as that demand continues to rise,” said Eng.

Eng noted investors are also continuing to demand low-cost ETFs, though they’re willing to pay more for the increasing number of active managed funds. 

Franklin Templeton’s global ETF platform has 100 ETFs worth $16 billion. It’s also planning some still-to-be-announced product innovation this year.