BMO sets out the top 10 trends in Canadian ETFs

ETFs are 10 years old this year and report sets out the highlights for the Canadian market

BMO sets out the top 10 trends in Canadian ETFs
Steve Randall

Canada’s first exchange traded funds appeared in 2009 and to mark the 10th anniversary BMO has published a special report on the trends that have shaped the market.

The ETF Report also looks ahead to the likely trajectory of the funds which have shown exponential growth since their inception.

"The industry has seen tremendous progress over the last decade, prompting innovative investment products and tools," said Kristi Mitchem, Chief Executive Officer, BMO Global Asset Management. "As the popularity of ETFs accelerates in Canada and across global markets, there is a greater need for education and support to maximize portfolio efficiency."

BMO’s top ten trends over the past decade are:

  1. Blending active and passive: Moving beyond the conventional wisdom of one or the other, the combination of active and passive investing allows for a more effective portfolio. For example, using passive investing in developed markets and active investments in less efficient markets where active management can make a difference.
  2. Resetting the core: Core ETFs continue to represent the backbone of the industry, as a vehicle delivering diversified broad market returns, especially in the event of a strong market rally as they typically include all the holdings in a market. BMO S&P 500 Index ETF (ZSP) is the largest U.S. equity exposure listed in Canada, with a market leading index.
  3. Changes in distribution: The popularity of ETFs across different investor types creates demand for various distribution models rendering ETFs more accessible. An innovative development in the industry, robo-advisors serve as an effective low-cost ETF investment platform. Currently the robo-advisor industry holds more than C$7 billion in assets and has an anticipated annual growth rate of 35 per cent. Additionally, the last ten years has seen a shift in advisor activity towards fee-based investing accounting for 73 per cent of assets under management (AUM).
  4. Adding new exposure: The industry recognized the importance of growth in over-the-counter (OTC) exposures early on, seeing it as an opportunity to invest across a range of asset classes and to help investors build and adjust portfolios with efficient, low-cost ETFs. In the last ten years, investors have relied more on ETFs in building fixed income portfolios, instead of focusing solely on equity markets. As one of the top ten fixed income ETF providers globally, BMO offers the largest fixed income ETF in Canada, BMO Aggregate Bond Index ETF (ZAG).
  5. Fees and CRM2: The implementation of CRM2 represented one of the biggest regulatory initiatives over the last decade. A significant step forward in client communications promoting transparency about costs and performance between advisors and clients. ETFs support this regulatory agenda, allowing advisors to establish individualized fee agreements with clients.
  6. ETF solutions: To make ETFs accessible to all investors, the industry has evolved towards ETF based funds, offering advisors untapped areas in which to invest while delivering lower cost solutions. Because of their effectiveness, active managers choose to include ETFs when creating portfolios.
  7. Portfolio guidance: The growing popularity of ETFs has led to the development of public access tools, positioning users to build robust portfolios based on different investment strategies.
  8. Active ETFs: The launch of active ETFs has generated a lot of investor interest, since they offer many of the same benefits as their passive counterparts, but with the added benefit of a manager that can adapt to changing market conditions. In response, the industry has seen a rise in actively managed ETFs, including active fixed income exposures like BMO Global Strategic Bond Fund (ZGSB).
  9. Education: As the ETF industry continues to mature, educational resources help to dispel myths and address misconceptions surrounding ETFs. Encouraging a better understanding of ETFs as an effective, transparent, low-cost vehicle in which to invest, remains an important goal for many providers, including BMO GAM.
  10. Asset allocation ETFs: More recently, balanced ETFs have re-emerged, offering a simple and convenient one-product approach to achieving a balanced portfolio. With more than 800 ETFs in Canada from 35 providers, investors must sort through increasing amounts of research, leading to a demand for simple basket ETFs.

"As a proud leader in the Canadian ETF industry, we have been growing and evolving our business in order to stay ahead of the curve and ensure we're meeting the needs of advisors and investors," said Kevin Gopaul, Global Head of ETFs, BMO Global Asset Management. "Ten years later, with a third of the market share, we remain well-positioned offering a comprehensive product suite that includes core equity ETFs and a broad range of fixed income ETFs, as well as solution-based ETFs."