What's next for the Canadian ETF space?

What's next for the Canadian ETF space?

What Though they’re still dwarfed by mutual funds, ETFs have definitely become investors’ fund of choice to access the fixed-income and equity spaces. And according to one major provider, numerous Canadian trends and developments will make the space bigger — and more complicated.

In its 2018 ETF Industry and Market Outlook, WisdomTree Canada predicted that overall ETF adoption rates, which currently still lag the US, may accelerate over the next few years as the industry reaches a critical mass. “If, hypothetically, the industry experiences 20% annual rises in AUM in the coming years, and underlying assets appreciate 4% per year, the Canadian ETF industry would be about one-third the total size of the mutual fund industry by 2024 (assuming mutual funds do not experience net outflows),” the firm said.

Predicting a critical role for core fixed-income ETFs in Canadian portfolios, the firm also said interest rates will also become a more critical factor. Noting better-than-even odds of additional rate hikes in the US and Canada, it predicted a likely shift toward fixed-income ETFs that are weighted more toward credit as well as shorter-duration instruments.

“Smarter” ETFs, which provide income while mitigating interest-rate risk, will also likely become more preferable. For this reason, WisdomTree Canada said it anticipates a shift from market cap-weighted ETFs “toward more optimal strategies such as fundamentally weighted ETFs.”

Globally, more ETF innovation is expected as providers grab market share from mutual funds. The trend will include more thematic ETFs which, in Canada, the firm expects to focus on millennial demand, artificial intelligence, robotics and political and social trends.

Finally, with the possibility of heightened discussions around CRM3 and full disclosure of management expense ratios of any investments, advisors are predicted to increasingly adopt ETFs for their lower fees relative to mutual funds. Citing a survey by Morningstar, the firm said Canada was one of three countries with the highest fund expense ratios out of 25 that were compared.

“For example, in fixed income, the median Canadian fund still charges an MER of 1.15%, whereas the ETF median is 0.29%,” the firm said, adding that it expects a decrease in market share and profit margins among traditional active managers in 2018.


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